What do AM best insurance ratings mean?

Key points

• AM Best is a credit rating agency that specializes in rating the financial strength of companies in the insurance industry.
• AM Best Financial Strength Ratings (FSR) shows a company’s ability to meet its financial obligations, i.e., making claims payments to you or your family.
• To determine a company’s rating, AM Best uses information from the company’s balance sheet, operating performance, business profile and more.
• As a consumer, AM Best ratings can show you how likely an insurance company is to fulfill your claim.

We buy insurance policies for financial protection in case of an emergency, whether it’s related to our home, car or health. But a lot of us don’t consider whether the insurance company we sign up with will have the financial stability to pay out our claim — we assume they will keep their word and pay out.

In reality, insurance companies need to be financially stable enough to be able to pay out any claim at any time. AM Best, the largest insurance credit rating agency in the world, analyzes insurers and gives them a rating on how financially strong they are.

“Insurance companies want to convey stability, as the entire reason for having insurance is that they will be ready to act and support you when needed,” says Matt Miller, founder and chief executive officer of the business insurance provider Embroker. “However, in order to do so, they need tremendous financial resources.”

AM Best ratings show consumers how financially secure insurance companies are so they can gauge whether they feel confident they’ll be able to pay out any claims.

What is an AM Best rating?

AM Best was founded in New York City in 1899, and says it was the world’s first credit ratings agency. Its entire focus is on insurance. AM Best assigns ratings to insurance companies small and large around the world that can help consumers gauge their financial health, among other things.

Most relevant to consumers is a company’s Financial Strength Rating (FSR), which rates the company’s ability to meet its financial obligations on a seven-point scale.

How does AM best determine its ratings?

AM Best looks at a company’s financials in order to assess their financial health. But they don’t just a look at financial statements. AM Best analysts sit down with senior management on an annual basis, says Ken Johnson, managing director at AM Best.

“It adds credibility to the ratings that we put out there,” Johnson says. They look at balance sheets, operating performance, risk management and the final rating comes from a committee vote. That helps ensure a lack of bias.

Based on the information it gathers, AM Best assigns one of the following financial strength ratings to companies:

RATING CATEGORIES	RATING SYMBOLS	RATING NOTCHES
Superior	A+	A++
Excellent	A	A-
Good	B+	B++
Fair	B	B-
Marginal	C+	C++
Weak	C	C-
Poor	D	–

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The rating category a company falls into indicates how likely AM Best believes it is to meet its financial obligations. For example, a company with a superior rating has a superior ability to meet its financial obligations; a company with an excellent rating has an excellent ability to meet its financial obligations; and so on.

What do the ratings mean?

“Consumers can use AM Best ratings as a quick gauge when comparing multiple options as a means to help determine the quality of a carrier – especially in terms of safety and security in their policy,” says Matthew Davis, the president of GDI Insurance Agency.

Most companies are rated A- or higher. Below that “they’re going to be either deficient in capital or maybe their performances are much more volatile than the guys that A minus and higher,” AM Best’s Johnson says.

That doesn’t mean you should dismiss lower-rated companies out of hand.

Some companies “may be very happy just staying at a BBB+ because there may be things that they would need to do at that company to get them to the next level that they may not be interested in,” Johnson says. They might also have a very narrow focus, like maybe they write a single product in a single state.

“Just from a very, very high level — would you rather have a B- or an A+? And I think you could probably answer that question yourself. There is this less concern at a higher level,” Johnson says.

He suggests not just looking at the letter rating, but also reading the AM Best report and then maybe get a better understanding of why the company is rated that level.

Some lower-rated companies might simply be smaller and more concentrated and are slowly expanding and getting more profitable, eventually working their way up to an A status, Johnson says.

Why do AM Best ratings matter?

AM Best Financial Strength Ratings show consumers how able an insurance company is to pay out its claims.

Imagine you own a home worth $300,000 and an electrical fire tears through it while you’re on vacation, destroying all of your worldly goods. Ideally, you file a claim with your homeowners insurance company and the insurer provides you with the funds to replace your home and goods based on your policy details.

But what if the company doesn’t have the money to pay out your claim? We just assume our insurance companies will be able to fulfill their financial responsibilities, but that’s not always the case. And AM Best ratings can help us determine how likely they are to do that.

“AM Best Ratings are critical when purchasing longer-term policies and products from insurance companies such as life insurance, where the future need for the insurance policy has a longer time horizon and the consumer wants more assurance the insurance company will be viable in the future,” Davis says.

The good news is that, as a consumer, you can easily check out AM Best ratings before you sign up for a policy. The company’s website is easy to navigate. From the home page, you can simply enter the name of the insurance company and it will show you the financial strength of the division of that company that serves your area and the type of insurance you’re buying. While an account is needed to access some information, it’s free to set up.

All that said, regardless of which policy you buy and which company you depend on, you’ll probably be okay.

Insurance companies tend to be among the “the most heavily regulated industries in the U.S.,” says Fred Tavan, senior vice president and chief pricing officer at Legal & General America, a life insurance company. “Because of that there has not really been any life insurance failures.”