If you intend to buy coverage shopping around, you should select an insurance provider that is capable of financially covering policyholder claims when a significant disaster happens. Due to the many components of an insurer, it is impossible to rely on a single ratio or model. This is because the steps to check an insurer’s financial strength are tough.
However, a simple method to check an insurer’s financial strength is determined by how highly they are rated by experts. In this article, we will discuss the process of checking an insurer’s financial strength and experts that could rate them.
How Can I Determine the Financial Strength of My Insurer?
While most insurance companies have good financial stability, your business may still want to take a deeper look into other factors that ensure their financial strength. Two organizations offer ratings of customer satisfaction and customer complaints of insurance companies. These organizations are J.D. Power and the National Association for Insurance Commissioners.
J.D. Power releases an annual report that provides insights into customer satisfaction and claims experiences with various insurance companies, including major providers. Meanwhile, the National Association of Insurance Commissioners (NAIC) maintains a database of consumer complaints filed against insurance companies.
How Are Insurance Companies Rated?
Meanwhile, insurance companies are rated based on the evaluation of the company’s financial stability. This evaluation includes everything insurance companies are responsible for, including salaries, overhead, and customers’ liabilities. Aside from these, other factors used to rate insurance companies’ financial strength include:
Capital Accumulation
This is one of the key metrics since insurance companies are required to be financially sound to pay claims. The company needs to have remarkable capital to be able to cover losses and remain in operation.
Asset Quality Assets
Insurance companies are rated based on the quality and diversification of their assets. Rating organizations look at the company’s investment portfolio to evaluate it.
Profitability
Ratings are made based on the insurance company’s history of profitability being a positive indicator of the company’s financial strength.
Operation Production
Rating organizations review how well an insurance company carries out its obligations. They review every area of the operations, like customer satisfaction, administrative practices, employee retention rate, underwriting discipline, and claims management.
Liquidity
Insurance company ratings reflect their liquidity, which indicates how easily the company can meet its short-term financial obligations without jeopardizing its overall financial stability.
Who Rates Insurance Companies?
Insurance companies are rated by third-party companies who can be objective since they are not stakeholders in insurance companies. In the United States, four companies are responsible for rating insurance companies; these companies are AM Best, Moody’s, Standard & Poor’s, and Demotech.
AM Best
This company was founded when insurance company failures were rampant. It is well known for its comprehensive ratings, which are now used to determine insurance companies’ financial strength. Its ratings range from A++ to show the financial stability from top to bottom.
Standard & Poor’s
Unlike AM Best, this company evaluates other companies but completely covers the insurance sector. It assesses the capacity of companies alongside their reliability in meeting financial needs completely and early.
Moody’s
Moody’s is one of the largest credit rating organizations worldwide. One of its specialties is evaluating insurance companies. They evaluate the capacity of insurance companies to pay out claims punctually.
Demotech
This is the youngest insurance company rating organization. It concentrates mainly on grading small to mid-size insurance companies. Its ratings begin from the highest to the lowest ratings.
Why Should I Care About My Insurance Company’s Financial Strength?
Selecting a financially stable insurance company with a good reputation for providing good customer service is important, especially for organizations and businesses. Your financial stability depends on your good choices when selecting an insurance company. Businesses depend on and trust the insurance provider to offer the services and pay out claims to keep the business operations going.
Final Thoughts
It’s important to become familiar with rating agencies to understand the financial strength of your chosen insurance company. These agencies offer free access to their ratings, making it easy to compare multiple insurers.
Many life insurance companies also display these ratings directly on their websites. While a rating isn’t a guarantee of an insurer’s financial stability, it’s a valuable factor to consider when looking for the best coverage.
