The AM Best Rating – A Consumer’s Indispensable Tool

In this time of economic upheaval, consumers are searching for footholds to aid them in scaling the mountainous terrain of choosing insurance products. An AM Best rating is one tool that trendy consumers are using to guide their decisions.

What is an AM Best rating? It is an independent, third party evaluation of a company’s financial strength based upon qualitative data (or data that describes the characteristics of an organization) as well as quantitative data (measurable and verifiable data based on statistical analysis). It includes a thorough evaluation of an organization’s balance sheet strength, operating performance and business profile. Why is that important to the consumer? It is a strong indicator of the insurance company’s ability to meet its financial obligations to its policyholders. An insurance policy is only beneficial if the company is able to pay claims after a loss.

Founded in 1899, the AM Best Co had as its mission “To perform a constructive and objective role in serving the insurance marketplace as a source of reliable information and ratings dedicated to encouraging a financially strong industry through the prevention and detection of insurer insolvency” (2008 Best’s Insurance Reports). Since that time, AM Best ratings have been the benchmark worldwide for assessing insurers’ financial strength. In this article, we will examine the two primary components of the AM Best rating for consumers: the financial strength rating and the financial outlook score.

AM Best evaluates insurance companies according to financial strength and performance much like our educational institutions grade students. These ratings range from
A ++ to F and indicate to the consumer if a company is a prudent choice to handle his/her insurance business. Following is a breakdown of ratings:

A ++ and A+ Superior
A and A- Excellent
B++ and B+ Good
B and B- Fair
C ++ and C+ Marginal
D Poor
E Under regulatory supervision
F In liquidation

Since the rating is one predictor of a company’s ability to handle financial obligations to its policyholders, the higher the ranking, the greater the ability to sustain financial commitment during adverse changes. I don’t know about you, but when I have a loss, I want excellent or superior chances that my insurance company can pay me to cover it.

A second component to understand is the company’s financial outlook. AM Best uses three criterion to gauge a company’s financial outlook.

1. Positive. This indicates that the current rating may be upgraded in the future.
2. Negative. This indicates that the current rating may be downgraded in the future.
3. Stable. This indicates that at this time it is unlikely that the rating will change in the future.

Before making an insurance purchase, you can check an insurance company’s profile to see how it scored on the AM Best rating scale. You can do this easily and for free by going. Click the “Ratings and Analysis” link at the top of the page. For data retrieval for some companies, such as health insurance companies, you may need to set up a free user name and id in order to access information. However, for others, like homeowner’s insurance, you simply type in the company you want to research and click “search”.

Let’s say you want to check on the ratings for Farmer’s. Initially, though, forty options appear on your screen. On the far right of the chart, the companies are listed by state. Click on Texas Farmer’s County Mutual Insurance Company and you have access to the Texas company’s rating, affiliation code (type of reinsurance grade), financial size and outlook. As mentioned, consumers are most interested in the rating and the financial outlook. A company with an “A” or higher rating with a positive or stable outlook, like Texas Farmer’s County Mutual Insurance Company, is very likely to be able to sustain policyholder losses in the case of unfortunate circumstances.

You can also use this tool if you are shopping around in search of a new insurer because the same criteria are used to evaluate each company. Therefore, you are looking at a tool that is measuring an apples to apples financial comparison between companies. Let’s take a look, for instance, at AIG. While the company has an AM Best rating of “A”, the outlook for the future is “negative”. Choosing a company with this type of overall score is a bit of a gamble.

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