Why AM Best Credit Ratings Are Important - SmartAsset

AM Best credit ratings grade the financial stability and the creditworthiness of insurance companies. Even though there are other credit rating agencies for businesses, AM Best is the only one dedicated to the insurance industry. AM Best ratings are considered the benchmark for credit ratings in the insurance industry. For help finding the insurance provider that meets your needs, consider working with a financial advisor.

What AM Best Does

AM Best is a 122-year-old credit rating firm for business, the oldest credit rating firm in the world. It has grown from a small office in New Jersey to a global business with world headquarters in New Jersey. It focuses on developing credit ratings for more than 16,000 insurance companies based on key financial metrics. AM Best is approved by the Securities and Exchange Commission (SEC) as being an official credit rating provider.

AM Best does exhaustive research into the creditworthiness and financial integrity of insurance companies that is targeted at both the insurance brokers and the consumer. It is crucial for consumers to know if the insurance carrier they choose is financially stable in the long run and whether they will be able to afford to pay their claims and meet their other financial responsibilities. Many insurance companies, like those offering warranties, have a long time horizon before some claims are paid. It’s important for consumers and brokers to know which ones can be expected to be financially stable over time.

Other credit rating agencies for businesses are companies like Standard and Poor’s, Moody’s Investor Services and Fitch Ratings, Inc. They are highly respected agencies, but none of them focuses just on insurance companies.

What Are AM Best Credit Ratings?

AM Best ratings are a lettering system with the letter rating indicating the insurance company’s financial strength (FSR), creditworthiness (ICR), issue ratings (IR) and national scale ratings. The financial strength portion of the ratings is usually most important to an insurance company since it is so crucial to its clients that it is financially strong in both the short run and long run.

The FSR’s focus mostly on the financial strength and creditworthiness of an insurance company with risk being a primary consideration. The IRC is the opinion concerning the future credit risk of an insurance company. Credit risk is the ability of a company to pay its financial obligations in the future. The IR is an independent and forward-looking opinion of the creditworthiness of a debt obligation of an insurance company and the impact of the obligation on the company.

What Factors Compose an Insurance Company’s FSR Rating?

AM Best ratings are composed of findings from many sources including these major sources:

Balance Sheet – The asset, liability and equity accounts on the insurance company’s balance sheet, and its relationships, are reviewed to analyze the company’s financial flexibility and risk management.
Enterprise Risk Management – The insurance company’s preferences for risk and how the company manages its risk based on its corporate objectives is analyzed.
Operational Performance – The long-term financial stability, balance sheet strength and historical performance of the insurance company are analyzed and incorporated into the credit rating.
Business Profile – The insurance company’s market position, competitive strategy, pricing, data quality and underwriting performance, along with other business statistics are analyzed.
Rating meetings – A financial analyst is assigned to the insurance company by AM Best to keep the company up-to-date on its AM Best ratings and to assess its financial strength, management practices and company goals on an ongoing basis.

AM Best Ratings and What They Mean

AM Best’s FSR and IRC rating tables show the relationship between the financial strength and credit ratings that AM Best ratings assign to insurance companies. The plus and minus signs are “notches” used to indicate improvements or declines in a company’s financial strength or creditworthiness. Along with the letter ratings and notches, AM Best also issues an outlook forecast for insurance companies that indicates whether the future looks positive, negative or stable.

Here is the general meaning of AM Best rankings:

“A” Category – Companies rated in the “A” Category are the strongest companies in terms of financial strength and creditworthiness and the outlook for each in the future.
“B” Category – “B” rated insurance companies will offer a client a “good” rating. This rating means that the company can offer solid insurance policies and reasonable certainty that the company will be around in the future to pay its claims.
“C” Category – A company ranked in the “C” range offers average security with an average insurance policy. There are usually no extras included with these policies. There is a risk of default.
“D” Category – Companies in this category are below AM Best’s minimum standard.
“E” Category – Companies under state supervision.
“F” Category – Companies in liquidation.

How Important Are AM Best’s Credit Ratings?

Insurance products are important for families who value the safety and security of the family. You don’t want to spend your money on a faulty product or company. Since most insurance products are fairly expensive, you need to be sure you are making a good investment. AM Best is considered the benchmark among credit rating companies, but they aren’t the only one in the marketplace.

A good practice for potential clients of insurance companies is to look at all the credit rating agencies that rate insurance companies. You should be able to get a reasonable picture of the financial health of a company. It’s very difficult to accurately predict the long-term financial health of insurance companies. For example, after Hurricane Katrina in the mid-2000s, many property and casualty companies failed or experienced serious financial hardships. In 2020-2021, there is the coronavirus pandemic which is a strain on health insurance and life insurance companies. It was impossible to predict these events in advance.

The Bottom Line

Choosing the right insurance company is an important safety and financial decision. Before buying an insurance policy, you need to look at the credit rating agencies and find the company in which you are interested. Compare the ratings from each agency for the company, but be certain to check the AM Best ratings for the company you’re considering. It may help you avoid a costly error in the future.

Tips on Insurance

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