Financial Ratings of Insurance Companies: Why is this important to you?
May 7, 2015
Author | Jasper Henderson, Sales Executive
Why is an insurance carrier’s financial rating important to you when deciding between different insurance carriers? Well, for one it’s a way to subjectively determine an insurance organization’s financial strength. Or to put it another way, its ability to pay claims. To obtain a financial rating, an insurance carrier must go through a comprehensive evaluation by an independent third party, such as AM Best, Standard & Poor’s or Moody’s to name a few.
Without financial ratings, the consumer and their business partners would have a harder time finding out how financially stable an insurance company is. For instance, if an insurance company declares itself as insolvent, their financial rating will drop. This information will let current and prospective policyholders know that an insurance company may not have the ability to pay its obligations. These obligations are to hold true and pay its policies and contracts with the insured. In short, if your company gets involved in a claim of any sort, they may be at risk to not see any of the benefits of having insurance. The insurance company may get involved, but there is a higher chance that they will not be able to pay for all of the damages to either party. There also is an increased chance that the company will decline to pay anything for the claim entirely or will perhaps argue the policy’s specifications. Now this may especially be true with the low-rated carriers; these types of companies are very much at risk to changes in underwriting guidelines, as well economic conditions. Companies that fall in this category generally fall below a B+ or B++ Financial rating.
Both admitted & non-admitted carriers can have financial ratings. The non-admitted carriers, also known as Excess and Surplus Lines Carriers, are companies that have not been approved by the state’s insurance department. It’s most likely due to the fact that the insurance company has not filed an application to comply with the state’s insurance regulations. An admitted carrier is one that has an application filed with the specific state and was approved by the insurance commissioner. These companies are required to file their insurance forms and rates with each state, along with a requirement to pay a portion of their income to a state guaranty association. It’s necessary to know that just because a carrier is a non-admitted carrier doesn’t mean they are not financially stable or a legitimate insurance company.
The importance of a financially stable insurance company couldn’t be more critical to motor carriers. For instance, a lot of brokers and/or shippers are adding a financial stability requirement to their insurance clause of their contracts. If this is not met by the motor carrier, it could be considered a breach of contract and there will potentially be legal consequences. Even brokers or shippers that don’t require contracts may still demand an insurance company with a high financial rating. If they don’t see that while reviewing your insurance filings for your authority, they may deny you the load. While going with that low-rated or non-rated insurance company at renewal time sounded like a good idea, now you are losing revenue for your business.
When deciding between insurance carriers, it’s important to know the carriers’ financial strength. It will give both you and your business partners piece of mind on the insurance carrier’s ability to pay claims that occur.
- “Finding a Reputable Insurance Company.” Finding a Reputable Insurance Company. Illinois Department of Insurance, June-July 2009. Web. 26 Mar. 2015. https://www.insurance.illinois.gov/general/find_reputable.asp
- “How to Assess the Financial Strength of an Insurance Company.” How to Assess the Financial Strength of an Insurance Company. Insurance Information Institute, n.d. https://www.iii.org/article/how-to-assess-the-financial-strength-of-an-insurance-company
- “Why a Best’s Financial Strength Rating Is Important.” A.M. Best’s Consumer Insurance Information Center. N.p., n.d. https://www.ambest.com/ratings/guide.asp.