Some insurance companies have better financial performance than others. All insurance policyholders or prospective holders should concern themselves with their carriers’ finances. Insurance rating companies provide ratings or scores you can use to evaluate different insurance companies. Below is an overview of these ratings.

Rating Significance

Insurance company ratings show their financial strength. A strong financial position shows that an insurance company is likely to:

  • Pay its claim settlements on time
  • Survive economic downturns
  • Provide relevant coverage in the event of catastrophes
  • Satisfy its clients with its services

Thus, you should consider an insurance company’s rating when shopping for coverage. The consideration is even more critical if you plan to hold your policy for a long time.

Rating Criteria

Every rating company has its methodology, but they all draw their conclusions from the same data. Below are some of the criteria these companies evaluate.

Cash at Hand

An insurance company’s liquidity represents the amount of money it can raise at short notice. High liquidity allows an insurance company to pay its claims promptly. For example, if insurers receive numerous claims after a disaster, the carriers with more cash at hand may settle their claims faster than other companies.

Revenue Stream Diversity

Insurance companies do not rely solely on premiums for their revenue streams. The companies invest their money in different sectors of the economy. Like other investors, carriers that diversify their investments can withstand economic turbulence better than those with limited diversity.

Debt-to-Asset Ratio

The debt-to-asset ratio is the total value of debts the company has divided by the total value of the company’s assets. A good ratio means the company has more assets than its debts and it is not in danger of insolvency.

Quality of Policies

The quality of policies refers to the risk ratings of the policies an insurance company holds at any time. Ideally, an insurance company should have a healthy mixture of high-, medium-, and low-risk policies. The more low- and medium-risk policies a carrier has, the better its financial position is.

Risk Management

Lastly, insurance companies face different business risks just like other businesses. The rating companies also evaluate how the insurers deal with these risks. Good risk management practice increases an insurer’s rating.

Rating Companies

Many companies rate insurance companies. However, the industry recognizes the following rating companies the most:

  • A.M. Best
  • Demotech
  • Standard and Poor’s
  • Moody’s
  • Fitch

The companies have different scales for their ratings. As such, you cannot directly compare ratings from different companies.

Usage

The rating companies place different weights on different rating criteria. For example, one company might emphasize an insurer’s cash at hand more than another company.

The best way to research an insurance company is to check its ratings from different rating companies. A high score from a single rating company might not mean much. However, multiple high scores from different rating companies typically mean that an insurance company is financially solid.

Special Considerations

Note that insurance company ratings are fallible. Fallibility is another reason to rely on scores from multiple rating companies.

In addition, you should consider other factors beyond these ratings while shopping for insurance. For example, you should consider rates, coverage, and quality of service. Such a holistic evaluation will point you to an insurance company that can meet all your needs.

Compare insurance carriers, rates, and coverage before purchase. Insurance is an investment that you should treat with the seriousness all investments deserve. Metropolitan Insurance Service Consultants, Inc., can help you research insurance companies and their offers. We can also help you compare quotes and buy the coverage you want. Contact us today for all your insurance needs.