When choosing an insurance carrier to cover your business, there are many factors to consider. Price and customer service are often at the top of this list—no one wants to overpay for coverage, and you want your claims paid out in a fair and timely manner.
Another piece to this puzzle that bears consideration is the financial strength of the insurance carrier, or their ability to pay out claims, if necessary. Many insurance buyers take this aspect for granted. Widespread disasters, such as hurricanes or wildfires, can test an insurance carrier’s financial strength. In fact, insurance carriers with poor financial strength can go bankrupt as a result of these disasters.
There are a number of rating agencies out there, and each one has their own criteria and rating system. In other words, ratings may not be consistent across all agencies, and an A+ rating may be high for one agency, but not as impressive for another. While each rating agency uses its own criteria, they will commonly evaluate a carrier’s financial performance, management performance, strategy, market size and vulnerability to disasters, among many others.
AM Best is one of the best-known independent credit rating agencies for insurance companies. They have been in business since 1899 and operate not just in the United States, but internationally as well. Insurance is the only industry they provide ratings for, and you will often see insurance carriers tout their AM Best rating in marketing materials.
They issue a number of credit-related ratings, including the Financial Strength Rating (FSR). The FSR is essentially the opinion of AM Best and represents the insurance carrier’s ability to meet policy and contractual obligations. AM Best has the following designations for its FSR:
- Superior: A++, A+
- Excellent: A, A-
- Good: B++, B+
- Fair: B, B-
- Marginal: C++, C+
- Weak: C, C-
- Poor: D
It should be noted that E and F are designations, not ratings. These letters indicate the insurance carrier has been publicly placed into conservation/rehabilitation (E) or liquidation (F).
In addition to the rating, AM Best will also provide an opinion outlook. This opinion generally looks ahead about three years and is either positive, negative or stable:
- A positive outlook shows that the insurance carrier is experiencing favorable trends. If these trends continue, the rating could be upgraded.
- A negative outlook shows that the insurance carrier is experiencing unfavorable trends. If these trends continue, they could be downgraded.
- A stable outlook shows the insurance carrier is experiencing stable conditions and the rating is unlikely to change.
Financial strength ratings are an important piece of your decision-making process when choosing a carrier; however, it is by no means the only factor to consider. Consult with ProAction Insurance to choose the best carrier in which to trust your business to.