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September 21, 2008 — Derek Epperson
My Insurance Policy - What is an Insurer?
We’ve covered some basic parts, characteristics, and definitions of insurance and the insurance policy. We’ve given you a few easy insurance definitions to give you a heads up when you discuss how insurance works; we’ve taken time to overview the parts of a insurance policy and the basic principles on which an insurance contract is designed. Review our archives to see those posts.
Today, we’ll continue down our list of basic insurance definitions and overview some things you should know about the insurer, or the insurance company.
First, the insurance company, or insurer, is the entity or business within your policy that agrees to indemnify (bring back to original status or financial condition) for losses you incur. Most insurers provide the same or similar products as others - auto, home, life, health insurance - so what should someone look for when choosing an insurance company?
Now most will read that last statement and the common answer will be ‘cost of premium.’ As consumers, price of insurance premium does play an important part in the decision-making process of choosing an insurer. But there is one misconception that floats around the insurance industry: all insurance companies are the same. As stated before, insurance companies may provide the same or similar insurance products as other companies, but all insurance companies are NOT the same.
The most obvious difference in the various insurance companies is their financial ranking among others. You wouldn’t want to purchase coverage from a company that goes belly-up when you try to collect on a claim. The A.M. Best Company is the leading provider of ratings, news and financial data for the insurance industry worldwide and Best’s Ratings are recognized as the benchmark for assessing the financial strength of insurance related organizations and the credit quality of their obligations.
Without getting into too many details of how the A.M. Best Company determines their rankings (remember, we’re trying to de-complicate insurance!), a Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet is ongoing insurance policy and contract obligations. It is based on a comprehensive evaluation of a company’s balance sheet strength (how much money they have or bring in versus how much debt and money they pay out), operating performance, and business profile. An important component of the evaluation process requires and interactive exchange of information with the insurance company’s management.
Here is the rating scale as determined by A.M. Best:
| A. M. Best Rating Guide | |
| A++ or A+ (Superior) |
Assigned to companies that, in the opinion of A. M. Best, have a superior ability to meet their ongoing financial obligations to policyholders. |
| A or A- (Excellent) |
Assigned to companies that, in the opinion of A. M. Best, have an excellent ability to meet their ongoing financial obligations to policyholders. |
| B++ or B+ (Good) |
Assigned to companies that, in the opinion of A. M. Best, have a good ability to meet their ongoing financial obligations to policyholders. |
| B or B- (Fair) |
Assigned to companies that, in the opinion of A. M. Best, have a fair ability to meet their ongoing financial obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. |
| C++ or C+ (Marginal) |
Assigned to companies that, in the opinion of A. M. Best, have a marginal ability to meet their ongoing financial obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. |
| C or C- (Weak) |
Assigned to companies that, in the opinion of A. M. Best, have a weak ability to meet their ongoing financial obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. |
| D (Poor) |
Assigned to companies that, in the opinion of A. M. Best, may not have an ability to meet their ongoing financial obligations to policyholders, and are financially extremely vulnerable to adverse changes in underwriting and economic conditions. |
| E (Under Regulatory Supervision) |
Assigned to companies (and possibly their subsidiaries and affiliates) that have been placed by an insurance regulatory authority under a significant form of supervision, control or restraint, whereby they are no longer allowed to conduct normal ongoing insurance operations. This would include conservatorship or rehabilitation, but does not include liquidation. It may also be assigned to companies issued cease and desist orders by regulators outside their home state or country. |
| F (In Liquidation) |
Assigned to companies that have been placed under an order of liquidation by a court of law, or whose owners have voluntarily agreed to liquidate the company. Note: Companies that voluntarily liquidate or dissolve their charters are generally not insolvent. |
| S (Rating Suspended) |
Assigned to companies that have experienced sudden and significant events affecting their balance sheet strength or operating performance, whereby the rating implications cannot be evaluated due to a lack of timely or adequate information. |
| NR-1 | Not rated: Insufficient Data. |
| NR-2 | Not rated: Insufficient Size and/or Operating Experience. |
| NR-3 | Not rated: Rating Procedure Inapplicable. |
| NR-4 | Not rated: Company Request. |
| NR-5 | Not formally followed. |
| n/a | This is not a company, therefore there is no AMBest rating. |
**For the sake of post length, I have combined some of the ratings with their desciptive guides; but please understand that there are variances in the ratings, i.e., A++ is better than A+, or B - is not quite as goog as just B.
As you can see, there are lower ratings listed which should cause you to think twice before purchasing a policy with that insurance company. If all companies were the same, there probably would be a need for ratings such as Weak, Poor, In Liquidation or Suspended!
So next time you’re looking a purchasing an insurance policy, check their A.M. Best rating. And if they won’t tell you or don’t know, tell them to call you when they find out!
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