How will I know if my Insurance Coverage Company is financially strong?
Probably the most reliable way to check the financial stability of an Insurance Company is by getting their financial rating and then understanding what that means. If an Insurance carrier company has strong financial health it is a measure of their ability to pay claims, particularly in times of catastrophe.
The balance small business website offers us a look at financial rating agencies to better understand how they work and why. The 5 top rating firms for Insurance Company ratings are:
The most prominent financial ratings agency for insurance carrier companies is A.M. Best, founded in 1899.They are in over 100 countries. Their requirements for the A rating are quite strict and stringent.
When many of the mortgage brokers began requiring their customers to place homeowners insurance policies with A rated insurance carrier companies many of the smaller insurance carrier companies found themselves unable to satisfy the A.M. Best A rating as their financials were not strong enough. A.M. Best assesses their rating based on these 5 items:
- Amount of cash on hand
- Debt Ratio (debt divided by financial assets)
- Diversity of revenue streams
- Risk Management protocols
- Quality of insurance policies written
In 1985 a firm called Demotech entered the arena to enable smaller insurance carriers not able to obtain the A.M. Best A Rating, to still get an A by requiring lesser financial strength markers. Not all rating agencies are the same as they certainly have different rating scales and criteria. Demotech develops their ratings by focusing on:
- Loss adjustment expense
- Reserve adequacy
- Liquidity of invested assets
- Quality of reinsurance.
To understand how financial ratings can matter, consider these 3 factors while reviewing a sample of how financial strength can change from year to year.
- Net Income – Total earnings, minus expenses (+ means profit and – means loss)
- Combined ratio – A calculation insurance carrier companies use to measure their profitability. They take the total of losses + expenses and divide them by the premium. If the ratio is below 100%, they are making an underwriting profit while a ratio above 100% means they are paying out more than they are taking in.
- Policyholder Surplus – The difference between an insurance carrier company’s assets and its liabilities, commonly known as net worth.
AANA provides a great case in point for how financial strength can go astray from one year to another. Hopefully, you will see that viewing the financial rating of insurance carriers before you buy their policy is worth doing.