Financial Institutions are almost obsessed with their FDIC “CAMEL” rating, and for good reason says Hank Bahr. A poor rating can result in “Memos” or “Cease and Desist” orders, which may scare customers into changing financial Institutions. But did you know your insurance company also gets “rated?”
Companies like Standard & Poors, Weiss and Dun and Bradstreet all rate the financial stability of insurance companies and their stock. However, the ‘gold standard’ insurance company rating bureau (certainly the best known in the insurance industry) is the A.M. Best Company. A.M. Best is the leading provider of ratings and financial data for insurance companies worldwide. Most federal regulators rely on the ratings of A.M. Best to measure the bank’s insurance company’s ability to pay claims. Do you know your bank’s insurance company’s A.M. Best rating? If so, do you know what it means? Why should you care about the rating at all? The answers to these questions along with some others about the rating bureaus will be the points of discussion of this newsletter.
Who or What is the A.M. Best Company?
(The following information is taken directly from the Best’s Key Rating Guide, Property / Casualty- 2010 edition.)
“A. M. Best Company is a global, full-service credit rating agency dedicated to serving the financial and health care service industries. It began assigning credit ratings in 1906, making it the first of today’s credit rating agencies to use symbols to differentiate the relative creditworthiness of companies.” The company concentrates almost exclusively on the insurance industry and an insurance company must ask for a rating (and pay the expense for the audit). It is considered a mark of “arrival” when a new insurance company receives its first A.M. Best rating.
So what does an A.M. Best rating look like and what does it mean?
The rating consists of a letter from A++ to F and S. These letter grades are broken into groups depending on their financial strength.
“Secure” companies have one of the following letter grades:
A++ and A+ (Superior)
A and A- (Excellent)
B++ and B+ (Good)
“Vulnerable” companies have the following letter grades:
B and B- (Fair)
C++ and C+ (Marginal)
C and C- (Weak)
E (Under Regulatory Supervision)
F (In Liquidation)
There may be other “ratings” such as u (under review), nr (not rated), and others but these are usually temporary modifiers. Each of these letter ratings will be followed by a Roman numeral. The Roman numeral stands for the financial size of the company. A Class I company has less than $1 million in policyholders’ surplus and a Class XV company has $2,000 million or greater in policyholders’ surplus. Unfortunately, changes from one class to another are not uniform but increase in amounts as the class number increases. In the author’s opinion, the letter grade is far more significant than the Roman numeral. An A.M. Best rated company of B+ XV should give the bank more pause than an A+ X ($750-$1,000 M).
Moreover, the insurance company rating should be weighed against the risk being transferred. A B- VIII company (Fair between $50M-$100M) may be perfectly acceptable for Credit Life or Automobile Single Interest coverage but VERY unacceptable for Directors & Officers Liability or a Financial Institution Bond.
Additionally, be careful of sudden downward changes in your insurance company’s rating. Such changes, even as minor as going from an A++ to an A+, should be investigated and explained.
Know your insurance company’s “A.M. Best Rating” at the very least. Getting other rating bureaus ratings for comparison is even better. Likewise, make sure your agent or insurance advisor keeps you informed as to any changes in your company’s rating. Remember, your insurance is only as good as the financial stability of your insurance company.