What Are Life Insurance Company Ratings?

By obtaining life insurance for your family or business, you're helping safeguard the people who depend on you financially — even after you're gone. Before purchasing coverage, however, you need confidence that the insurer will be able to pay all its claims in the decades ahead.

Fortunately, independent agencies use a financial strength and stability rating scale to help establish this confidence. You can use those life insurance company ratings in your buying decision, as you judge whether the carrier will be there for your loved ones when they need it most.

Why Are Financial Ratings Important?

When you purchase a life insurance policy, the company is making a promise to pay the death benefit to your beneficiaries when you pass at some unknowable point in the future. If you have a permanent policy with cash value, they're also guaranteeing your ability to withdraw funds or take a loan during your lifetime.

However, those assurances depend on the company having enough cash on hand for the foreseeable future. If the company's investments underperform in a given year — or it pays an unusually high number of claims — it needs enough of a financial cushion to continue fulfilling its obligations. There's no federal program that provides a backstop if an insurer runs into financial trouble. That means the financial wherewithal of the business is critical for policyholders.

Evaluating the fiscal health of an insurer is a challenging task for the average consumer, to say the least. Fortunately, several independent ratings agencies serve that role. Their business is to carefully evaluate each company's financial records and assign it a letter grade based on those findings. Consumers in turn can look to those ratings, often free of cost, when deciding from which insurer they'll buy a policy.

How Are Life Insurance Company Ratings Determined?

Four prominent rating agencies evaluate the health of insurance companies: AM Best, Fitch Ratings, Moody's and S&P Global Ratings. These firms ultimately share a common goal: to determine an insurance provider's ability to meet its financial obligations going forward. Their financial strength rating does not pertain to specific life insurance policies. Instead, it speaks to a company's overall ability to continue paying claims.

While the process for arriving at a financial strength rating differs slightly for each rating agency, they generally follow these steps:

1. The insurance company applies for a rating from the agency.
2. The agency assigns an analyst or group of analysts to meet with the company's management team.
3. The analyst team evaluates the insurer's financial strength using a combination of qualitative and quantitative factors.
4. The agency uses a committee vote, often with the involvement of analysts as well as more senior members, to arrive at a rating for the insurer.
5. The agency announces the rating through a press release and posts the grade on its website.
6. The agency periodically reevaluates the company and, when necessary, revises its rating.

Corporate filings, such as balance sheets and income statements, play a key role in the evaluation process. But agencies generally go beyond those key documents when arriving at a rating. For example, they may look at the risk level associated with the investments the company has chosen, and they may analyze the carrier's underwriting process to predict its future liabilities.

Should the insurer disagree with the agency's rating, it may have the ability to file an appeal with the agency. It may also choose to withdraw the company from the agency's rating process, although that's a relatively infrequent outcome and generally reflects poorly on the insurer.

Understanding the Ratings for Each Agency

All four rating agencies assign a letter grade for each of their life insurance clients. The life insurance rating scale varies a bit from one agency to the next, although companies often use a descriptor to help clue you in. For example, both an A++ and an A+ grade from AM Best indicate "superior" strength. A slightly lower grade of A or A- is still considered "excellent," while a B++ and B+ are "good."

As the ratings get lower, the agency's confidence in the company's claims-paying ability starts to decrease. For example, grades of C++ and C+ from AM Best indicate "a marginal ability to meet their ongoing insurance obligations" — not a designation that elicits a lot of confidence for would-be policyholders.¹ By the time you get down to a D, the company's ability to pay its future debts is considered poor.

You can search the scores from all four agencies (if they provide a rating for the insurer) to get a broader view of the company's overall health. To simplify your research, however, you can also look up the Comdex score for each insurer. Comdex uses a numerical score of 1–100 to reflect the company's ratings from multiple agencies. A score of 100 indicates the carrier received the highest marks from every agency.

While receiving the best possible mark from a given agency may give policyholders additional confidence, scores anywhere in the A range generally reflect a company that has a strong operating model and enough assets to pay its debts in most market conditions.

However, the letter grade assigned to a company doesn't always tell the whole story. For example, some smaller insurers may receive a grade in the B tier in part because they have a limited product lineup or serve customers in only a few states. Rather than relying on the letter grade alone, reading the agency's explanation for its rating helps provide useful insights into the company.

Which Rating Agencies Should You Trust?

All four companies that rate insurance company financial strength have a very long history in the industry. Each assesses the insurer's corporate profile and financial statements when assigning a grade. While they look at a lot of the same data for each insurance client, there's always a subjective element to their process. For example, one agency may put more weight on a company's operating income, while another might place a slightly higher emphasis on the condition of its balance sheet. When it comes down to it, their assessment of a particular company is a best guess at its ability to pay obligations in the future.

It's also important to be aware of potential conflicts of interest within the industry. The ratings agencies are paid by the companies they evaluate, after all, and if the insurer doesn't agree with the grades they're getting from a particular agency, they can appeal or outright end the relationship. Therefore, no rating should be considered bulletproof.

Unfortunately, identifying which agencies are "best" is a difficult proposition. It's hard to find reliable data on the trustworthiness of an agency's ratings over time. That's why using a more holistic approach — looking at the consensus among multiple rating firms — seems the more sensible approach when evaluating life insurance providers.

How to Find a Life Insurance Company Rating

Credit rating agencies generally post insurer financial strength scores on their websites, but some require consumers to pay a subscription fee to view them. That said, there are some alternatives. For instance, agencies like AM Best and Fitch Ratings regularly announce their most recent rating for a company through press releases that you can access through a simple internet search. These media releases include not just the letter grade they've assigned for the carrier but also a detailed explanation of how they arrived at that grade.

Even if you're not interested in paying a fee to a rating agency, you may be able to find other ways to find a company's score. A strong rating is a valuable marketing tool for a company. That's why insurance companies often post their ratings on their website free of charge. Often the company will also post its Comdex score.

Using Company Ratings to Compare Insurers

The purpose of life insurance is to give you confidence that your loved ones will be more financially secure when you pass away. Buying a policy from a provider without the financial strength to reliably pay its long-term obligations defeats that purpose. That's not to say a company has to receive the highest mark from every rating agency, but a rating in the A or upper B range across the board offers greater certainty.

While the financial strength of a company is critical, it usually isn't the only factor you should consider when choosing an life insurance insurer. You also want to make sure that a given provider offers the type of policy you want and has a strong reputation for customer service. Should you need to file a claim or make changes to your policy, you want a company that will provide the assistance you need.

The market data firm J.D. Power provides an annual customer satisfaction survey for companies in the individual life insurance market, though only the largest carriers are represented on its list. You can also look up the company's letter grade from the Better Business Bureau, which reflects the volume of complaints made about the insurer as well as its track record of resolving those disputes.

Of course, price is also a major factor when comparing life insurance quotes. Often, policies from financially healthy companies are comparable to those of lesser-ranked competitors, so even if you can snag a somewhat lower premium by going with an insurer with middling scores, consider whether those savings are worth it in the long run. You don't want your family — or your employees if a business is your beneficiary — to wonder whether the company guaranteeing the payout will make good on its claim.

The Bottom Line

Rather than using agency ratings as the sole criterion in your search, you may want to use them as a way to weed out the most problematic companies. Once you narrow your list to companies with a "good" or better rating, you can start to sort them based on the other factors — such as price, product selection, design features and customer service — that matter to you most.

Sources

1. The Value of a Best's Financial Strength Rating. https://consumers.ambest.com/content.aspx?rec=261606.