How can I assess the financial strength of an insurance company?

How can I assess the financial strength of an insurance company?

Four independent agencies—A.M. Best, Fitch, Moody’s and Standard & Poor’s—rate the financial strength of insurance companies. Each has its own rating scale, its own rating standards, its own population of rated companies, and its own distribution of companies across its scale. Each agency uses numbers or plusses and minuses to indicate minor variations in rating from another rating class.

The agencies disagree often enough so that you should consider a company’s rating from two or more agencies before judging whether to buy or keep a policy from that company. Moreover, agencies will announce changes of ratings on any day. It’s probably prudent to check annually on the ratings of any company you’re interested in.

Some points for using the ratings:

  • Don’t rely only on what the insurance companies say about their ratings from these agencies. Companies are likely to highlight a higher rating from one agency and ignore a lower one from another agency, or to select the most favorable comments from a rating agency’s report.
  • To use the ratings from more than one independent agency, you need to understand that each agency’s rating code is different from the others. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, and out of 19 categories for S&P). Moreover, Moody’s doesn’t have an A+ rating.

However, the ratings can be classified into “secure” and “vulnerable” mega-categories. Here, as of August 2009, are the rating scales for each of the “secure” rating classes, and all the “vulnerable” classes combined (source: The Insurance Forum, September 2009 issue).

Ratings Agency Contact Information

All of the ratings agencies can be found on the Web, or reached by phone.

Agency Web site Address Phone number
A.M. Best Company, Inc www.ambest.com Ambest Rd.
Oldwick, NJ 08858
908-439-2200
Fitch Ratings www.fitchibca.com 1 State Street Plaza
New York, NY 10004
1-800-75-FITCH
Moody’s Investor Services* www.moodys.com 99 Church Street New York, NY 10007 212-553-0300
Standard & Poor’s Insurance Ratings Services* www2.standardandpoors.com 55 Water Street
New York, NY 10004
212-438-2000
The Street.com www.thestreet.com   1-866-321-8726

 *To use these Web sites, you have to register, but the service is free.