Understanding your carrier

When a catastrophic event occurs, companies depend on their insurance carriers to pay the claims under the provisions of their policies. However, if a company did not secure their insurance with a financially stable carrier as determined by the rating agencies, under a catastrophic event, a carrier would not be able to respond to each and every claim. Therefore, you would take the risk of not being paid the loss incurred on your insurance policy.

Alex Ponce, production underwriter with Royal Marine Insurance Group, says it’s easy to find out if your carrier will be able to shoulder the load if a disaster does happen.

“You have to refer to the financial strength of insurance carriers,” says Ponce. “That can be done through A.M. Best Company, which is the most well-known organization that provides financial services for the insurance industry.”

Smart Business spoke with Ponce about how the ratings are created and what they can tell you about your insurance carrier.

What do the ratings mean, and why are they important?

The financial strength rating is important for insurance companies because it serves as a strategic tool that can enhance the consumer’s confidence toward an organization’s stability. A good financial strength rating can make one insurance carrier more attractive than another.

There are actually three ratings agencies. The most well known is A.M. Best, which specializes in the insurance industry. There is also Fitch Ratings, which basically concentrates on creditworthiness. It’s more financial than anything; they do not specialize in the insurance industry. Also important to know is Standard & Poor’s, which is basically a credit rating industry for investment research. It’s important to have a company that is recognized with all three of the ratings agencies. But obviously, you should concentrate on A.M. Best, because of its specialization in the insurance industry.

How does the ratings system work?

A.M. Best’s financial strength rating determines whether a company is secure or vulnerable. The best possible rating is an A++, which is superior. It goes all the way down to F, which means liquidation — the company is basically out of business. You have to take into consideration that if there is a catastrophic loss, you want to make sure that your insurance carrier will be able to respond to all of its claims. If they are not financially sound, obviously they won’t be able to pay on their obligations.

A.M. Best’s strength rating measures an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is a comprehensive quantitative and qualitative evaluation of companies based on balance sheet strength, operating performance and business profile.

What type of rating should consumers target?

Anything below a B rating is unacceptable. You have to be looking for at least an A or higher for stability. Here’s an example of a carrier that has an A.M. Best rating of a B. They have an A.M. Best rating, so they are a sizable enough company and they are recognized within the insurance industry. But a rating of a B or worse could signify that a company is on the brink of bankruptcy. You want to find an insurance company that only works with carriers with an A.M. Best rating of A or better. That shows a commitment to you, their client. You want an insurer that takes every step to make sure you have the best security available.

On top of that, there is a rating outlook that can be added to the financial strength. The outlook is used to indicate an insurer’s potential direction over an intermediate term (12 to 36 months). This is useful because a company can have a superior financial stability mark, but at the same time its outlook can be positive, negative or stable. That is another point you have to look for.

Another category within A.M. Best’s rating system is the financial category size. There are 15 categories, ranging all the way from less than $1 million in adjusted PHS (policyholders’ surplus) all the way to $2 billion and greater.

What are the pros and cons of the different financial categories?

If the financial category is near the high end, consumers should have no worries about the company becoming insolvent and being unable to meet its liabilities. If a company is in a smaller financial category, you are definitely more vulnerable. It could potentially not be able to meet its obligations if there is a catastrophic loss.

In order to be rated by the various agencies, a company must meet certain criteria. Furthermore, other legal requirements must be met for a company to carry out insurance services in a country and/or a state. An insurance provider may have its categories and ratings, which means it is recognized in the insurance industry as being established. However, it should also be financially secure. Insurance carriers should be able to meet all of their obligations, in terms of the losses they need to pay out, should a catastrophic event occur.

What can insurance agents do to improve customer confidence?

Agents should always provide a carrier’s financials and/or A.M. Best rating of the insurance carrier whenever coverages are proposed. Agents ought to have that information readily available. Rating information can also be obtained online from any of the three agencies, as well.

For further insight and rating information, visit www.ambest.com.