AM Best ratings are a comprehensive measure of the financial strength and creditworthiness of insurance companies. AM Best is one of the oldest and most established rating agencies dedicated to the insurance industry. Their ratings are widely recognized as a benchmark for assessing the financial health of insurers, including property & casualty insurers, health insurers, life insurers and annuity insurers. The co-founders of PlanEasy started and ran an annuity insurer, where we gained a lot of experience working with AM Best and became very familiar with their ratings process.

Here is a primer on AM Best ratings:

1. Purpose:

Assess Financial Strength: Determine the ability of insurance companies to fulfill their financial commitments, particularly the payment of claims to policyholders. The rating that customer's often pay attention to first is an insurer's Financial Strength Rating (FSR).

Credit Ratings: Evaluate the creditworthiness of insurers, including their ability to repay senior obligations and debts.

2. Rating Scale:

AM Best ratings range from "A++" to "D" for Financial Strength Ratings (FSR), reflecting the range from Superior to Poor in terms of financial strength and ability to meet ongoing insurance policy and contract obligations. Here are the general categories, with descriptions paraphrased by us with bold emphasis ours:

  • A++ and A+ (Superior): Highest ratings, indicating a superior ability to meet ongoing insurance obligations.
  • A and A- (Excellent): Companies have an excellent ability to meet their ongoing insurance obligations.
  • B++ and B+ (Good): Companies have a good ability to meet their ongoing insurance obligations.
  • B and B- (Fair): Companies have a fair ability to meet their ongoing insurance obligations, but are more vulnerable to adverse changes in underwriting and economic conditions.
  • C++ and C+ (Marginal): Companies have a marginal ability to meet their ongoing insurance obligations.
  • C and C- (Weak): Companies have a weak ability to meet their ongoing insurance obligations.
  • D (Poor): Companies have a poor ability to meet their ongoing insurance obligations.

    Here is A.M. Best's guide to its Financial Strength Ratings (FSR) discussed above, current from their website as of 1/4/2024: Guide to Best's Financial Strength Ratings - (FSR)

3. Factors in Rating Determination:

Balance Sheet Strength: Examines the level of capitalization, quality of assets, and reserve adequacy.

Operating Performance: Looks at profitability, earnings stability, and growth.

Business Profile: Considers the business mix, geographic spread, and distribution channels.

Enterprise Risk Management (ERM): Evaluates the company's risk management policies, practices, and its ability to understand and minimize risks.

4. Importance for Consumers and Companies:

For Consumers: Ratings provide an insight into the insurer's ability to meet its financial obligations, helping consumers and businesses make informed decisions about choosing an insurer.

For Insurance Companies: A strong rating can be a marketing tool, helping to attract new customers and retain existing ones. It can also affect an insurer's ability to raise capital and the terms of that capital.

5. Regular Review:

AM Best continuously monitors the companies it rates, taking into account new financial data, changes in management, and any significant events that may impact the company's financial stability. Ratings are therefore subject to change.

6. Global Perspective:

AM Best provides ratings for insurance companies all over the world and its ratings are used as a standard measure of financial strength globally.

Conclusion:

AM Best ratings are a critical resource for anyone involved with insurance companies, whether you are buying insurance, working for an insurer, investing in one, or comparing financial strengths. The ratings help provide a clear, independent perspective on the financial health and creditworthiness of insurance companies. As with any decision, however, they should be used as one of several tools in making informed choices about insurance-related transactions.

Reach out to us at support@planeasy.com if you have any questions - we're happy to help. We at PlanEasy started and ran an annuity insurer; thus, we have rare experience and expertise having worked closely with AM Best and its entire ratings process.

Not legal or financial advice.