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Insurance Company Ratings Explained

The worldwide financial crisis that swept across the globe several years ago has brought cause for concern among banks, insurance companies, and financial institutions the world over.

Now more than ever, it’s important to look at insurance company ratings before choosing a specific insurance product. Insurance company ratings are more important where life insurance is concerned, but homeowners and auto insurance need attention as well.

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How well an insurance company is rated tells consumers a great deal about whether or not to trust them with their insurance needs. A strong rating means a favorable company to do business with, while a weak rating means just the opposite. Insurance company ratings can be found readily on the Internet with a few minutes of searching.

Two Kinds of Insurance Company Ratings

The term “ratings” is loosely used by many consumers who don’t know the industry definition. We tend to think of ratings in the same way moviegoers would review a film after seeing for the first time. In this same vein, you may see insurance companies claiming to be the highest rated for customer satisfaction and response. While such claims may be true, these ratings are based on customer opinion polls that do not accurately reflect the state of the company.

The insurance company ratings consumers need to be more aware of are those produced by financial institution rating companies like Standard & Poor’s. Ratings from these companies have nothing to do with customer satisfaction or opinion polls. Rather, they are based on hard financial data and the known history of the company they apply to. They measure the financial strength and stability of an insurance company rather than customer satisfaction.

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What is Measured by Insurance Company Ratings

The top four financial rating institutions are A.M. Best, Fitch, Moody’s, and Standard & Poor’s. When one of these companies rates an insurance provider they are looking at three basic things; financial strength, credit rating, and debt rating. The definitions of these things are as follows:

  • Financial Strength – This is a rating based on the overall financial strength of the insurance company and its ability to meet current contract obligations. In other words, their ability to pay out the claims they are liable for under the policies issued.
  • Credit Rating – This rating is an analysis of an insurance company’s ability to meet its current senior debt obligations. Senior debt is comprised of loans and other financial vehicles with precedent over unsecured, junior debt vehicles.
  • Debt Rating- Debt rating is a measure of the insurance company’s ability to meet obligations on debt securities and insurance securities at the time they come due.

To understand the big picture of how insurance companies are rated, think of it in terms of your own household budget. Your current financial health takes into consideration your income and debt load, and the likelihood that you’ll be able to meet your debt load on an ongoing basis. If your finances are healthy, you should have no difficulty paying your bills now or in the short-term. But an unhealthy financial situation means you’re currently having trouble, or may face trouble in the near future. Insurance companies are rated the same way.

Why Insurance Company Ratings are Important

While obtaining any kind of insurance with a financially unstable provider is never a good idea, the concern is less when dealing with auto policies. This is due in part to the fact that an auto insurance policy is not an investment. It’s a simple fee-for-service product. Even so, it doesn’t make sense to get an auto policy with a company that’s on poor financial ground and may have trouble paying out a significant claim if you have an accent.

Where insurance company ratings are extremely important is in the area of life insurance. All forms of life insurance, with the exception of term life, are investments of sorts. A policyholder invests his premiums over the course of the contract with the assumption that the insurance company is doing the same. The combination of both party’s investments means a financial return to the policyholder greater than the amount he contributed.

With that in mind, it’s clear to see that a financially unhealthy insurance company puts your investment at risk. If it is unable to meet its contractual obligations to you in the future, you could potentially lose everything you put into the policy as well as the benefits you’re expecting. So always check the financial health of an insurance provider before buying life insurance.

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