Choosing an insurance provider goes beyond finding one that offers the best rates and coverage. You want a stable, financially secure insurer that you know will be there if you ever have to file a claim. But how can you tell if your insurer is stable? By looking at their rating.

An insurer’s rating gives you important information about their financial stability and ability to cover future claims. It can mean the difference between a smooth claims process to one where you’re left holding the bag.

What is a Rating Agency for Insurance?

Respected, independent third parties like AM Best, Moody’s, and S&P Global assign ratings to insurance companies. These ratings reflect evaluations of the insurer’s funding, its risk, and overall operating performance. Ratings agencies also look at an insurer’s competitors, business profile, and management style.

Ultimately, the rating an agency assigns to an insurance company is meant to reflect its financial strength and ability to meet its obligations. If, for example, you have to file a claim on your liability policy, you want to know that your insurer has the funds to pay it out. An insurance rating gives you confidence in your insurer. 

What are the Levels for Insurance Ratings?

While each ratings agency has its own metrics, most use a grading system of A++ to F. Similar to a report card, a higher letter grade indicates that the insurer has a strong financial position and can payout on its policies. Moody’s, Fitch Ratings, and Standard & Poor all rate insurance companies, but AM Best is the traditional standard in the industry, because of its length of time rating insurers, objectivity, and specialty. 

Source: The Direct Effect: Insurance Company Ratings Explained

If your insurer has a rating from A++ to B+, they fall within the secure category. There’s a high likelihood they can meet their insurance obligations. Companies with a B through C- are more vulnerable to changes in underwriting and economic conditions. And those with a D to E are likely to default, may be under significant regulatory supervision, and also might have been placed in liquidation.

When looking at insurance ratings, you also might see a numeric rating in the form of a Roman numeral. AM Best uses this rating to indicate the insurer’s financial size. They assign numbers from I (less than $1 million) to XV (more than $2 trillion). Minimally acceptable ratings will be shown as A-VII.

Why do Insurers Have Their Ratings Downgraded?

Insurers closely monitor their ratings. A downgrade could make it harder to grow by attracting new capital or harm profitability if policyholders shift insurers as a result. Reasons for a downgrade could include: 

• A large number of claims paid.
• A change in the marketplace such as pressure from state governments to pay business interruption claims after COVID.
• A reduction in the company’s financial reserves. 
• Management or structure changes within the company, particularly C-suite turnover. 

What If the Insurance Company Goes out Of Business?

Insurance companies fall under state jurisdiction. State regulators monitor the financial health of the insurers licensed in their state. If an insurer fails, a state’s guarantee fund may offer some protection for policyholders.

However, state guarantee fund coverages and claims processing vary by state and policies. Policies are subject to each state’s coverage limitations. This system has worked historically but large-scale losses could lead to a need for other interventions to ensure solvency.

Am I safe if I work with a Highly-Rated Insurance Provider?

It’s tempting to think that if your insurance provider has a high rating, you don’t have anything to worry about. But that’s not entirely true. Many insurers work with third parties and subcontractors, so those company’s ratings are just as important. 

Let’s say a subcontractor insured by a lower-rated company causes a loss. Their insurer can’t pay the claim, so it flows upstream to your insurance provider. If your company has to assume this risk, and can’t subrogate to a third party, the claim will appear as a loss against your policy and risk profile. 

To mitigate this risk, check the rating of the company issuing the COI. Do not accept any insurer with a rating less than A- and make sure the issuing company’s size matches the financial rating size your risk management team requires.

Why Does a Vendor’s Insurer’s Rating Matter

You purchase insurance to hedge risk and offset the costs of any events that could negatively impact your business (such as a lawsuit). Subcontractors' and vendors’ insurance policies also impact your risk - if their insurance can’t cover a claim you might have to cover unexpected costs. Tracking their COIs and insurers is an important part of risk management. For this reason, vendors are oftentimes contractually required to work with a financially sound insurer. 

If you manage multiple subcontractors and vendors, a robust COI tracking platform can make it easier to track and verify COIs. TrustLayer’s platform analyzes vendor-provided COIs and compares them to minimum insurer ratings you select. It flags low ratings, helping you identify subcontractor risk.