Why AM Best Credit Ratings Matter


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AM Best credit ratings assess the financial stability and creditworthiness of insurance companies. Although there are other corporate credit rating agencies, AM Best is the only one dedicated to the insurance industry. AM Best ratings are considered the benchmark for credit rating in the insurance industry. To help you find the insurance provider that meets your needs, consider work with a financial advisor.

What AM Best does

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

AM Best conducts extensive research on solvency and the financial integrity of insurance companies which targets both insurance brokers and the consumer. It is crucial for consumers to know whether the insurance company they choose is financially stable over the long term and whether they will be able to pay their claims and meet their other financial responsibilities. Many insurance companies, such as those that offer guarantees, have a long time horizon before some claims are paid. It is important that consumers and brokers know which ones should be financially stable over time.

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

What are AM’s best credit scores?

AM Best Ratings is a lettering system with the rating letter indicating the insurance company’s financial strength (FSR), creditworthiness (ICR), issue ratings (IR) and nationwide ratings . The financial strength part of ratings is usually the most important for an insurance company because it is so crucial to its clients that it is financially strong in the short and long term.

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

What factors make up an insurance company’s FSR rating?

AM Best’s ratings are composed of results from many sources, including these main sources:

  • Balance sheet – The asset, liability and equity accounts of the insurance company’s balance sheet, as well as its relationships, are reviewed to analyze the financial flexibility and risk management of the company.

  • Business risk management – The risk preferences of the insurance company and how the company manages its risk according to its business objectives are analyzed.

  • Operational performance – The long-term financial stability, the strength of the balance sheet and the historical performance of the insurance company are analyzed and integrated into the credit rating.

  • Company Profile – The market position of the insurance company, its competitive strategy, pricing, data quality and underwriting performance, as well as other business statistics are analyzed.

  • Rating meetings – A financial analyst is assigned to the insurance company by AM Best to keep the company informed of its AM Best ratings and to continuously assess its financial strength, management practices and objectives.

AM Best Notes and what they mean

AM Best’s FSR and IRC scoring tables show the relationship between financial strength and the credit ratings that AM Best ratings assign to insurance companies. Plus and minus signs are “notches” used to indicate improvements or decreases in a company’s financial strength or creditworthiness. In addition to the letter ratings and notches, AM Best also publishes an outlook forecast for insurance companies that indicates whether the future is positive, negative, or stable.

Here is the general meaning of AM Best rankings:

  • Category “A” – Companies rated in the “A” category are the most solid companies in terms of financial strength and solvency and future prospects for each.

  • Category B “ – Insurance companies rated “B” will offer a customer a “good” rating. This rating means that the company can offer strong insurance policies and reasonable certainty that the company will be there in the future to pay its claims.

  • Category “C” – A company classified in the “C” range offers average security with an average insurance contract. There are generally no extras included with these policies. There is a risk of default.

  • Category “D” – Companies in this category are below AM Best’s minimum standard.

  • Category “E” – Enterprises under State supervision.

  • Category “F” – Companies in liquidation.

How Important Are AM Best’s Credit Ratings?

Insurance products are important to families who value the safety and security of family. You don’t want to spend your money on a faulty product or business. Since most insurance products are quite expensive, you need to make sure that you are making a good investment. AM Best is considered the benchmark among credit rating companies, but it is not the only one in the market.

It is good practice for potential clients of insurance companies to consult all credit rating agencies that rate insurance companies. You should be able to get a reasonable picture of the financial health of a business. It is very difficult to accurately predict the long-term financial health of insurance companies. For example, after Hurricane Katrina in the mid-2000s, many P&C insurance companies went bankrupt or experienced serious financial difficulties. In 2020-2021, there is the coronavirus pandemic which is straining health and life insurance companies. It was impossible to predict these events in advance.

The bottom line

Two insurance brokers

Two insurance brokers

Choosing the right insurance company is an important financial and security decision. Before purchasing an insurance policy, you should consult the credit rating agencies and find the company that interests you. Compare each agency’s ratings for the business, but be sure to check out the AM Best ratings for the business you are considering. It can help you avoid a costly mistake in the future.

Insurance advice

  • Planning for the future is an important task for a family. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset free tool connects you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is best for you. If you are ready to find an advisor, start now.

  • Are you looking for life insurance? Do you know how much you need? SmartAsset has a calculator for that.

Photo credit: © iStock.com / marchmeena29, © iStock.com / Jirsak, © iStock.com / Weekend Images Inc.

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