How to assess the financial strength of an insurance company

Five independent agencies—A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), 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 ratings from more than one independent agency, you need to understand that each agency’s rating scale is different. For example, an A+ from A.M. Best is the second-highest of its 15 categories, while an A+ from Fitch, Kroll, or S&P is their fifth-highest rating (out of 24 categories for Fitch, 22 for Kroll, and 19 for S&P). Moreover, Moody’s does not have an A+ rating.

However, the ratings can be classified into “secure” and “vulnerable” mega-categories.