How Life Insurance Company Ratings Work
When you are looking for an annuity or a life insurance policy, people often say that you pay attention to life insurance company ratings. That is good advice, as it’s one primary indicator of an insurance company’s financial strength.
Unfortunately, they also don’t usually tell you how to find those ratings or what they mean. In this article, we will give a quick rundown of life insurance company rating basics, who gives them, and what these ratings mean for you.
What Are Insurance Company Ratings?
The idea of an insurance company rating is to give you a succinct, comparable description of the financial strength of insurance companies. The ratings companies look at many factors but mostly at how well the insurance company performs financially, how well it’s run, and its vulnerability to financial shocks (events that have a negative effect on its financial well-being).
Essentially, various rating agencies maintain what are, in effect, ‘credit scores’ for insurance companies. These ratings consider more than just financial standing, however. They examine customer satisfaction, the availability of the insurer’s products, how many options they offer, and whether their pricing is competitive with the market.
The score will also consider how well the company has historically responded to major events that could affect, or even compromise, its ability to uphold its obligations to its policyholders.
Other Ways to Check on Insurance Company Financial Strength
There are other means that you can use to evaluate an insurance company’s ability to make good on its long-term promises, such as a company solvency ratio. A solvency ratio refers to how much in surplus reserves above the dollar-for-dollar reserve requirement which an insurance company must maintain.
For example, a solvency ratio of 105 means that a life insurance company has a dollar and five cents in reserves above every dollar of annuity premium that it holds. In this case, the surplus reserve is five cents above the minimum dollar-for-dollar reserve.
Solvency ratios and life insurance company ratings often can vary. What’s more, a high solvency ratio isn’t necessarily correlated with a strong insurance company rating.
This is why it always makes a difference to do your due diligence on the annuity product and issuing life insurance company that you are exploring.
Financial Issues Reviewed
The financial health of the company will be looked at first. Some of the financial and economic issues the rating companies consider are:
- Revenue streams available to the company (diversity is important)
- The company’s cash reserves and cash on hand
- Debt-to-assets ratio of the company (divide debt total by financial asset total)
- Ethics and risk management protocols
- Quality of the policies the company has underwritten (not all or even most policies are high-risk)
It’s important to note that the various rating companies measure and weigh all of these statistics differently. These differences are probably why the ratings may differ from one rating company to another.
Who Rates the Insurance Companies?
Various rating agencies evaluate and ‘rate’ insurance companies, but there are four whose ratings are generally considered the most important. We look at these four below.
A.M. Best
A.M. Best is the most well-known company that focuses on insurance company ratings. A.M. Best’s ratings and scores are the benchmark for evaluating financial strength in insurance. Their highest rating is A++ (Superior), and the lowest is D (Poor). A.M. Best only rates insurance companies.
A.M. Best doesn’t provide information only on US markets and issuers. It researches and makes available data on insurance companies and economies worldwide.
Standard & Poor’s
Standard & Poor’s is a much broader financial information company than A.M. Best. It provides stock indices and rates businesses in many market sectors, including insurance.
S&P’s focus is on the ability and willingness of an insurance company to meet its financial obligations in full and on time. In other words, they are telling you how likely your insurance company is to pay your (or your beneficiaries’) claims in a timely manner. Its scores range from AAA (Extremely Strong) to D.
Moody’s
Moody’s is another ratings business generalist but includes insurance companies in their overall business ratings mix. Their focus is financial stability, the market risk the company faces, and its overall performance.
They look at these areas to determine the likelihood of the company paying your claim on time and in full. Their ratings are Aaa (Highest Quality) to C (lowest rated, often in default).
Moody’s works to help decision-makers manage risk and identify opportunities by providing its trusted standards and insights. Moody’s ratings are forward-looking opinions on the relative credit risks of financial obligations of various financial institutions, including issuing insurance companies.
Its “A’ ratings are generally considered investment grade. Meanwhile, Baa and below feature higher risks and may not be considered investment grade under a particular state’s laws.
Moody also offers a short-term rating scale focusing on an issuer’s ability to repay all its short-term obligations rather than any specific short-term borrowings. The ratings range from P-1 representing a superior ability to repay, down to P-3, which is acceptable. NP means that the entity doesn’t fall within any of the payment ratings.
Do Insurance Company Ratings Matter?
Insurance company ratings are an important part of due diligence for finding the right product for your financial goals. You are giving a company a lot of money over the short or long term and expecting a long-term return on your money.
If the life insurance company goes under, then it will disrupt payments from your annuity or potentially affect the assets held in your annuity or life insurance policy. That long-term financial obligation means you need to be comfortable with the security of your money and the stability of your insurer.
The good news is that life insurance companies have a remarkable history of low company failure and standing strong in all sorts of economic cycles.
What Stands Behind the Life Insurance Companies?
Insurance companies don’t have a federal insurance program like FDIC insurance. Instead, state guaranty funds cover the failure. In some cases, they can take a long time to reimburse you.
Coverage limits for this can vary from state to state. Starting with a highly rated life insurance company in the first place will significantly reduce your risk of needing to care about these issues. Also, keep in mind that life insurance companies have tended to perform quite well in many kinds of market and economic conditions.
The ratings help you determine whether a policy that looks great on paper may have issues arising from the issuing company.
Even a great-looking annuity with the most incredible benefits won’t be so wonderful if the issuer can’t pay for it in the long run. Because you are looking for long-term financial security, you should be at least relatively sure that your annuity will be there when you need it.
It’s also prudent to look at more than just insurance company ratings as part of this decision-making. We will go over other things to consider in a moment.
What About an Unrated Company?
Occasionally, you may find a product that you find really interesting with an unrated company. Although your first instinct will (and mostly should) be to move past that policy, the company may be unrated because it’s new or regional and doesn’t get rated as a national issuer.
You can look at customer reviews, but always look at an unrated company with a bit of suspicion before committing.
Other Things to Think About
Don’t forget about various other issues when thinking about going with a particular life insurance company.
Companies that meet all financial tests well may fall on the range of offerings, customer service, or claims handling. To discover how these issues work with a company you are considering, look at their customer complaints.
The National Association of Insurance Commissioners (NAIC) is an organization whose membership is composed of the head of the insurance regulatory agency in each of the fifty states, the District of Columbia, and five U.S. territories.
NAIC maintains a database of complaints against insurance companies. It might be worth a check-up, because even a financially sound company with poor customer service won’t be great for you, or your beneficiaries, over the long haul.
The higher the insurance company’s score, the more complaints it will likely have. You should also look for online reviews about their customer service, annuity and life products, and more.
Some Final Thoughts on Life Insurance Company Ratings
Remember, though, that insurance company ratings are predictions. They are forward-looking statements giving the rating agency’s best judgment on what an issuer will do in the future.
The ratings companies don’t guarantee these statements and would be in regulatory trouble if they tried to do so. Nonetheless, they perform a valuable service by providing thorough and easy-to-understand information about insurance companies to the public.
Don’t be afraid to ask your financial professional about any questions that you have about their recommendation, or the insurance company that they are suggesting. These are your life savings, and you should feel comfortable with any decision that you make.
Your financial professional can help you make well-informed decisions about your annuity or life policy, or retirement planning in general, by combing through companies that don’t seem promising for long-term financial obligations.
What if you are looking for a financial advisor or agent to help you find retirement products that make sense for your situation? Or perhaps you would like for an experienced financial professional to give an independent, second opinion of your current retirement strategy.
For your convenience, many independent financial professionals are available at SafeMoney.com to assist you. Get started by using our Find a Financial Professional section and connecting with someone directly. You can request an initial appointment to discuss your goals and situation. Should you need a personal referral, please call us at 877.476.9723.
