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Insurance Raters & Company Ratings of Financial Strength

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Introduction

Insurance is something that you'll come to rely on in life should any accidents befall you or your loved ones, but unless you're in the industry, policies of any kind are incredibly difficult for a layman to understand. All insurance companies are reviewed by financial institutions to determine just how fiscally stable they actually are.

But actually comprehending just what these ratings mean is not the easiest process, with a lot of industry speak and frankly boring documents.

If you don't pay attention, or your eyes start to glaze over, you may well miss some vital information. Before doing any business with an insurance company, it's essential to have a clear understanding of their financial rating and any reviews that have been performed.

Failure to do so could lead to major issues in the future, and you don't want to learn too late that the insurance you've gone with cannot pay out in times of great crises such as floods, hurricanes, or even fires. So before you stumble on a financial review, here's a handy guide to decoding insurance reviews and ratings.

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Why Are Insurance Company Ratings Important?

Insurance company ratings are designed to gauge a company's financial stability through a holistic examination of their organization. There are numerous factors that comprise the ultimate score, including the business' current success and how well they've handled past disasters. This is the case for all kinds of insurance, be it life, auto, or home.

But the criteria for how the ratings are made differs greatly from region to region. A home insurance company in Florida, for instance, would probably have a poor rating after a hurricane or flood destroyed many homes. For a more pertinent, recent example, health insurers all took the same kind of hit at the start of the pandemic.

It's absolutely crucial to at least know your insurance company's score, as you share a continuing financial responsibility to one another. If at a time such as a pandemic or flood, they are unable to pay out, you will likely be unable to cover any damages.


How Are Ratings Determined?

The ultimate role of a rating for an insurance company is to gauge just how financially sound they are, and as mentioned there are different criteria depending on where you live. But there are some guidelines that are more common than others, including:

  • Amount of cash on hand
  • Debt ratio
  • Diversity of revenue
  • Risk Management
  • Quality of policies

No credit agency uses the same measurements, and each has its own methods. But it's worth noting that, whatever their methods, the information they're using to devise a rating is exactly the same.

Who Watching and Rating Insurance Companies?

There are many different companies and groups that keep track of insurance performance. The most common is A.M. Best, though others you may be familiar with are:

  • Demotech

  • Standard and Poor's

  • Moody's

  • Fitch


Financial Ratings Aren't Everything

A financial rating for an insurance company is a good guiding principle, but they're far from infallible. Merced insurance, for instance, was given an A- by A.M. Best. That didn't stop it from going bankrupt in 2018 after the violent summer of wildfires that plagued California. Many other financial groups also were pretty confident in Enron before it became embroiled in endless scandals.

So while financial ratings are a good place to start, it's not the last word in judging your insurance.


How Many Companies Were Given A+ Ratings?

In general, if you've seen it on television or in major ads, it's got a good rating. With exception taken to any local small-time insurance companies, the biggest insurance companies generally are rated very well. This means, so far, they have stable business models and even in great panic are unlikely to fail.

Other Ratings to Consider

As you can see, a good financial rating might not be enough information. When you're buying insurance, it's important to gather all the information you can about the people who are going to be handling your claims. One way to do so is to look at customer reviews. On a personal level, it can be incredibly handy just to have an understanding of how well you'll be treated when you're doing business.

The National Association of Insurance Commissioners (NAIC) keeps a record of all complaints lodged against an insurance company and weighs them against how much insurance is sold. This index of complaints can offer insight into, for instance, the best home insurance companies in Michigan, or the best car insurance in Georgia. Some states offer this information statewide, but you'll have to check depending on where you live.

For a comprehensive understanding of customer satisfaction, one can look to J.D. Power. This consumer research organization does these kinds of ratings for every industry. It's another good starting point, however many of these reviews only tell you how good the company is at a particular service as opposed to a more generalized account of how sound their business model is.

If you'd care to look at individual reviews from customers, including complaints, the Better Business Bureau has such records as do websites such as Yelp. However, an individual online is more likely to share a negative experience than a positive one. It's just the nature of the internet, so you have to judge these accordingly.

Of course, there's still no guarantee. Ultimately, it's about who you trust, the people that you meet that handle your insurance. Because the industry can often feel impersonal, especially if you go with a major insurer.

But it helps to trust the people that handle your claims, even if the experience is not as intimate as you'd expect. The best thing you can do is to make yourself comfortable. And part of doing so is arming yourself in the fine art of decoding insurance ratings and reviews. They should never be the deciding factor, but they should certainly play a major role in your decision.

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