Understanding Insurance Companies' Financial Ratings

Now more than ever, your insurance carrier's financial rating should be a primary concern before purchasing any type of insurance. Of course, coverage, terms and premiums must be evaluated but if your insurance carrier is out of business when it's time to pay a claim, then these factors are of no consequence.

There are numerous rating agencies that review insurance companies' financial information. One rating agency that is used by many insurance brokers is A.M. Best Company. Best's Key Rating Guide lists a Financial Strength Rating for insurers; it is an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. The rating is based on a comprehensive qualitative and quantitative evaluation of a company's balance sheet strength, operating performance and business profile.

It is important to note that a Best Financial Strength Rating opinion addresses the relative ability of an insurer to meet the ongoing insurance obligations — it is not a warranty of a company's financial strength and ability to meet its obligations to policyholders.

For Financial Strength, the rating scale is as follows:

Best also assigns each rated insurer a Financial Size Category (FSC). The FSC is based on adjusted policyholders' surplus and is designed to indicate the size of a company in terms of its statutory surplus and related accounts. Financial Size Categories range from a Class I through Class XV. XV is the largest Financial Size Category.

A Rating Outlook is also assigned to a Financial Strength Rating to indicate its potential direction over an intermediate term (around 12 to 36 months). A Rating Outlook may be Positive, Negative or Stable.

Here are some examples of ratings from Best's Guide dated September 1, 2009.

As a service to our clients, upon request, our underwriters will be pleased to provide you with the latest Best rating for any insurance company either before you purchase insurance or during the policy period.

In the meantime, for a handy one page summary of Best's Financial Strength Ratings, click here.

If you have any questions about insurer ratings, please call one of the knowledgeable professionals at Liftman Insurance 617-439-9595.