The Impact of Ratings when Searching for an Insurance Company
When deciding which insurance carrier you want to go with, what is the most crucial factor you consider? Is it coverage? Price? Experience vs recommendations?
You must explore all these avenues when finding the right provider for your organization. Out of all the questions you must answer, one of the most informative items to consider is insurance company rating.
When shopping for coverage, it is important to understand what each rating means and what coverage you will receive. In this article, we are going to uncover the most relevant elements that define ratings for insurance companies.
What is an Insurance Carrier Rating & Why is it Important?
An insurance carrier rating, or insurance company credit rating, is the opinion of an independent agency regarding the financial strength of an insurance company. According to the educational organization Investopedia, “an insurance company’s credit rating indicates its ability to pay policyholders’ claims.”
In other words, an insurance carrier rating is a company’s financial ability to pay off their client’s claims, as determined by a third party. This rating is important because insureds depend on their insurer to make the payments of claims. An insurance company can only pay for losses if they have money, so having an insurer with a high rating is important when making sure you will have financial coverage.
This also applies to policies that provide protection for legal defense costs. When individuals or organizations cannot afford these legal expenses on their own, they can rely on their insurance when facing a lawsuit. By going with an insurer with a high credit rating, insureds can assure they will receive the coverage.
In conclusion, a carrier rating is not about whether an insurer will accept certain claims or the number they will accept. It is about if the company has the necessary money to cover the claims that their insureds may make.
Who Rates Insurance Companies?
There are numerous reputable insurance rating platforms for you to choose from. One of the most trusted and popular insurance carrier rating organizations is AM Best. Their easy-to-use site allows insureds to search for their provider and view a detailed report of their rating.
How does it work? Insurers are assigned a score between A+ and D, A+ being the highest and D the lowest. Higher ratings mean an insurer is more financially secure and has a better ability to pay their insured claims. Here is a breakdown of each score a company could receive.
- A+ Superior: Companies that have a superior ability to meet their insurance obligations.
- A Excellent: Companies that have an excellent ability to meet their insurance obligations.
- B+ Good: Companies that have a good ability to meet their insurance obligations.
- B Fair: Companies that have a fair ability to meet their insurance obligations.
- C+ Marginal: Companies that have a marginal ability to meet their ongoing insurance obligations.
- C Weak: Companies that have a weak ability to meet their ongoing insurance obligations.
- D Poor: Companies with a poor ability to meet their ongoing insurance obligations.
There are also four Financial Strength Non-Rating Designations that an insurance provider could receive. These are for organizations under a court order or other direction to limit policyholders payments, going through liquidation, suspended, or those who AM Best has not rated. These ratings include E, F, S, and NR. Insureds should avoid companies with these designations.
A good practice when reviewing ratings is to compare results with different platforms. You can also visit Moody’s or Fitch Ratings to compare differences and similarities in scores that insurers receive.
What Factors Contribute to Lowering an Insurance Companys Rating?
Higher ratings for insurance companies pique the interest of insureds and investors. Therefore, receiving a low rating, or even moving down from an A+ to an A, can negatively affect an insurance provider.
A lot of factors can contribute to a lower grade for an insurer. Here are the most common causes of what could cause an insurer to receive a lower rating.
- Economic Downturn: When the economy is not doing well, investors are less likely to give more money to insurers. This means less financial reserve for an insurer and decreased ability to pay claims.
- Internal Changes: Changes cause instability and uncertainty and in the executive suite of an insurance company can have a negative effect.
- Industry Changes: As the insurance industry changes, so does each company. The most recent example is the COVID-19 pandemic that caused unprecedented disruption to the insurance industry dramatically changing business activity.
- Global/Local Events: Events that are widespread place a larger strain on insurers. For example, a company may struggle to pay for all the claims related to a hurricane.
Insureds should take insurers’ scores into account and weigh the pros and cons of going to a company with a higher/lower rating.
While the suggested best practice is to avoid companies with the lowest ratings, sometimes it is beneficial to go to an insurer with an average score. Every situation is unique, so as an insured you need to investigate your own risks and decide how important a high rank is to you.
Does Going with a High-Rated Insurer Assure Coverage?
Most of the time, if your insurer has a high financial rating and they accept your claim, you will receive coverage. But if you work with third parties, you also need to keep their insurance companies in mind.
For example, if one of your vendors has coverage from a poorly rated company that cannot pay their claim, they will look to you for insurance. This could result in a damages payment from your pocket or increased premiums on your policy.
To avoid these situations, check the insurance company that your vendors work with and assure you they have coverage by requesting updated Certificates of Insurance (COI). By streamlining this process, you can avoid manual workflows of requesting and collecting COIs by using a certificate of insurance tracking and management software.
Schedule a free product demo to learn how SmartCompliance helps automate this process and keeps you protected!
