The A.M. Best Insurance Ratings Explained And How To Use Them

With technology as expansive as it is today, we can check reviews and ratings on just about anything. And often these reviews and ratings can play a critical role in helping us decide which company or product to purchase from. When it comes to the insurance industry, A.M. Best is the Nationally Recognized Statistical Rating Organization (NRSRO) in the U.S. by both the U.S. Securities and Exchange Commission and the National Association of Insurance Commissioners. This simply means that the U.S. federal government has certified Best’s ratings, and to put it simply – are trustworthy ratings and opinions.

Focus on the Insurance Industry

A.M. Best’s ratings are focused solely on the insurance industry. They issue financial-strength ratings which measure an insurance company’s financial strength and ability to pay claims, and their likelihood to do so. A.M. Best issues ratings for insurance companies providing property, casualty, life, and health insurance coverage. A.M. Best provides access to insurance company ratings and profiles free of charge on their corporate website – www.ambest.com.

It is important to note that A.M. Best is not the only insurance rating company out there, however they are the oldest and the most widely recognized rating company when it comes to the insurance industry. A.M. Best was founded in 1899, and in addition to tracking the U.S. domestic insurance market, they also monitor the status of many international insurance carriers.

How Best’s Ratings are Determined

A.M. Best assigns both a Financial Strength Rating and a Financial Size Rating to each insurance carrier that they rate. There are some insurance carriers that A.M. Best is following, but have not rated, and these companies are identified as NR. A.M. Best’s ratings are also reviewed frequently and can change as changes are made within the insurance industry and an individual insurance company.

According to A.M. Best, their Financial Strength Ratings are calculated through a comprehensive analysis consisting of a quantitative and qualitative evaluation of the company’s balance sheet strength, operating performance, business profile and enterprise risk management. A.M. Best’s Financial Size Category rating is a numerical value symbol that is assigned to indicate the size of an insurance company based on their reported policyholder surplus, conditional or technical reserve funds, other investment and operating contingency funds, and miscellaneous voluntary reserves reported as liabilities in U.S. dollars. Typically, when an insurance agent or broker mentions an insurance carrier’s A.M. Best rating, they are referring to Best’s Financial Strength Rating for that carrier.

A.M. Best’s Financial Strength Ratings

The A.M. Best Financial Strength Ratings (FSR) are the opinions assigned to an insurance carrier based on their financial strength and ability to meet their obligations to policyholders. A.M. Best also assigns a rating outlook to each carrier, which indicates their potential direction of the next 1 to 3 years.

The A.M. Best Financial Strength Ratings are made up of two categories of ratings: Secure Ratings and Vulnerable Ratings. Each rating may also be followed by either a positive or negative sign, indicating where in the class the rating falls. These ratings are broken down as follows:

In addition to providing an insurance carrier with a letter grade on the Financial Strength Ratings scale, A.M. Best also assigns each insurance carrier an outlook projection rating of either Positive, Negative, or Stable. This rating indicates A.M. Best’s opinion on the potential direction of each insurance carrier over the next 1 to 3 years. A Positive outlook indicates that the insurance carrier is experiencing favorable financial and market trends, relative to its current Financial Strength Rating; and if these trends continue, the insurance carrier has a good possibility of having its FSR upgraded. A Negative outlook indicates that the insurance carrier is experiencing unfavorable financial and market trends, relative to its current Financial Strength Rating; and if these trends continue, the insurance carrier has a good possibility of having its FSR downgraded. A Stable outlook indicates that the insurance carrier is experiencing stable financial and market trends, and that there is a low likelihood that the insurance carrier’s FSR will change over an intermediate period.

It is important to remember that although the A.M. Best ratings are an opinion of A.M. Best on the financial strength and reliability of an insurance carrier, these ratings are not warranties of an insurance companies financial strength and ability to meet their obligations to policyholders. It is important to review these ratings and use them in consideration of which insurance carrier will be right for you, but it should not be the sole factor on which you make your insurance purchasing decision.

Understanding an insurance carrier’s A.M. Best rating score, and how it is relative to your decision to choose a specific carrier can be difficult but we are here to help! Having the right insurance coverage is imperative to protecting your financial security. If you would like to review or compare your current coverage, or need to get new coverage, contact us today to discuss your insurance needs!