For consumers, a key factor when shopping for a new insurance policy is creditworthiness, or how financially strong and stable an insurance company is. Almost all insurance companies — from those that deal with personal insurance, like Auto and Homeowners insurance, to those handling business policies, like Liability and Property insurance — receive independent analysis and ratings from a range of third-party agencies.
These ratings guide consumer choices, which is why it’s important to understand how they work. AM Best, one of the oldest and most prominent independent insurance rating agencies, reports on over 16,000 insurance companies. Here’s what you need to know about AM Best and how it assigns its ratings.
The Independent Rating System
AM Best is one of several agencies that assesses and rates insurance companies for consumer consideration. Besides AM Best, the three major agencies are Fitch Ratings, Moody’s, and Standard & Poor’s. Each has its own rating system that, while similar in some ways, is highly specific.
Independent rating systems for insurance companies have existed for well over a century, as a way to assist consumers and hold insurance companies accountable to their policies. Essentially, consumers can use these rating systems to determine whether an insurance company will actually pay its claims — a crucial piece of trust when purchasing a policy. As a whole, this strengthens the insurance industry, by guiding consumers to trustworthy businesses and steering them away from fraudulent ones.
What Is AM Best?
AM Best was founded in 1899, and for over a century has focused solely on rating insurance agencies. While based in the United States, the company has offices all around the globe, and provides ratings for international insurance companies.
Beyond providing a straightforward rating for an insurance company, AM Best also provides information on its research process, sharing quantitative and qualitative materials on an insurance company’s financial health. For instance, AM Best conducts meetings and interviews with thousands of insurance companies to gain qualitative information about their financial health, which it then shares with consumers.
How Does AM Best Rate Insurance Companies?
At a glance, the AM Best financial rating system is easy for consumers to understand. Insurance companies are given a letter grade which can range from A++ (superior) to D (poor). The full ratings system is broken down as:
- A++ or A+ (Superior)
- A or A- (Excellent)
- B++ or B+ (Good)
- B or B- (Fair)
- C++ or C+ (Marginal)
- C or C- (Weak)
- D (Poor)
Essentially, a higher letter grade indicates that an insurer is more likely to pay any financial claims, whereas a lower grade lets consumers know that the insurer is at a higher risk of defaulting on its policy. Ratings are re-evaluated each year, and there are instances in which brand-new companies don’t yet have an AM Best rating due to lack of data.
To determine these grades, AM Best analyzes a number of factors, including a company’s balance sheet strength, its operating performance, its business profile, and its enterprise risk management (ERM). And, as previously mentioned, AM Best also meets with each company annually, to learn about their financial goals and better understand the company structure and planning.
Ratings provided by the trusted independent agencies can vary, so it can help to look at all of them rather than just the ones highlighted by the insurance company itself. Other sources of information, like consumer reviews, can also be helpful sources of information.
And of course, consumers will consider the overall policy as well as cost when shopping for a new policy. While AM Best ratings are critical, there are a wide range of factors that play into the modern consumer’s decision-making process when selecting an insurance company.