The AM Best financial rating gives you a good idea of the financial stability of an insurance carrier. It is given by AM Best, a financial credit rating agency that focuses specifically on insurance companies and issues ratings on a carrier’s financial strength.
Key Takeaways
- When you start shopping for insurance, one of the first considerations that will likely come to mind is cost. And while the premium matters, you will need to keep other important factors in mind too, like the hours of operation, who handles claims, and how claims are processed. One overlooked factor is the financial rating of the carrier.
- The AM Best rating matters because the liquidity of a carrier—its ability to pay for unanticipated losses—comes down to whether the carrier can afford to pay your claims or not.
- Some states have a state guaranty fund to cover claims if a carrier becomes insolvent.
The History of AM Best
AM Best was founded by Alfred Magilton Best—hence the name. Founded in 1899, the company immediately began publishing reports on the insurance industry and insurance carriers.
In 1904, Baltimore suffered the third-worst fire in US history, and in 1906, San Francisco experienced both a terrible earthquake and a devastating fire. As a result of these catastrophes, many insurance companies did not have the financial resources to cover their losses and went bankrupt. This, in turn, left many businesses and people impacted by the fires and earthquakes without any assistance.
In response, AM Best developed the first credit ratings for insurance companies. Presently, AM Best is a global company with credit ratings for property and casualty and life insurance providers. Businesses and individuals alike rely on its ratings to determine the financial stability and solvency of carriers. While it isn’t perfect, AM Best has maintained a good record for over 100 years of evaluations on a global scale.
AM Best Rating: A Closer Look
AM Best has several different ratings for insurance companies, but the most common is its financial strength rating of insurance companies. These rankings are as follows:
- A+ and A++ (Superior)
- A- and A (Excellent)
- B+ to B++ (Good)
- B to B – (Fair)
The ratings continue down to D.
The ratings are forward-looking assessments of the insurance company’s financial ability to meet its ongoing insurance obligations. So, a carrier with a rating of A+ (Superior) is deemed to have a superior ability to meet its ongoing financial obligations. Likewise, one with a B+ (Good) is assessed to have a good ability to meet any insurance obligations.
In the opinion of AM Best, an insurance company with a rating lower than a B+ comes with a risk, as unfavorable conditions like a natural disaster or sudden adverse changes in underwriting may impact the provider’s ability to meet its obligations for insurance.
How AM Best Evaluates Carriers
Typically, AM Best reviews and rates insurance carriers on an annual basis, though sometimes it will provide this service at the request of the carrier. It conducts its rating and review process by analyzing information provided by the carrier, including answers to a questionnaire. Some of the information that AM Best will inspect are:
- Insurer’s balance sheet
- Operating performance
- Business profile
- Management and interim management reports
- Regulatory filings
- Enterprise risk management
If appropriate, AM Best will also examine the securities of the carrier.
The process is not one-sided. AM Best will communicate questions and points of clarification with the carrier throughout the process. Once the information is gathered, a rating committee makes the determination and then continues to monitor the carrier after the rating is published.
How to Find AM Best Ratings
Locating the AM Best rating of an insurance company is fairly easy.
- Many providers will publish their current ratings on their web pages, often on their “About Us” page or within the sales pitch for why you should choose that particular carrier. They include their AM Best rating because the industry at large recognizes that it is an important component in shopping for insurance.
- You can also locate the AM Best ratings directly from the source, as AM Best publishes individual pages for each carrier. It also publishes a regular report that lists the financial strength ratings for insurance companies across the globe. Again, you can obtain this report directly from AM Best for free.
Why AM Best Matters
It may seem trivial to consider the financial rating of a carrier. However, just like any company, carriers can run out of money and go bankrupt.
Not many years ago, the carrier I was working for received an influx of employees from an insurance company in Florida that had gone bankrupt. When I asked one of the managers what had happened there, they said they paid all of their claims until they ran out of money.
Imagine you are a small business owner and you come in to reopen the business after the holidays only to discover your business was burglarized and $15,000 in equipment, including the register, had been stolen. The next day, your carrier files for bankruptcy.
This doesn’t mean your claim automatically won’t be paid—the carrier may still have enough liquidity to handle it, or a state guaranty fund might pay it. However, it is very likely that you will not receive a swift resolution to your loss and that you will need to undergo a long and possibly tedious process to get paid for a simple named-peril loss.
Frequently Asked Questions (FAQs)
S&P, or Standard & Poor’s, is also a company that offers a rating system for insurers that evaluates financial strength. While each company has a different approach, the results when you compare ratings are usually the same. That said, several companies evaluate the financial strength of an insurance company, and it is a good idea when getting quotes to consider the rating from at least two different agencies.
When comparing quotes, brokers will usually provide the AM Best rating for the providers. So if you see that a company has a rating of A++ (Superior), you know it has received the highest AM Best rating available.
AM Best is a private company that is known for providing financial evaluation, among other services, for insurance companies. In contrast, NAIC (National Association of Insurance Commissioners) is a nonprofit organization that, in many ways, serves as the de facto federal regulation for the insurance industry as a whole. It monitors the trends of insurance companies, including compiling complaints received at the state level for each line of business. It also helps guide carriers on coverage and publishes reports on industry trends.
Bottom Line
When you’re comparing insurance quotes, one factor to consider is the financial strength of the carrier. AM Best is a pioneer in that space, having started issuing ratings for insurance companies over 100 years ago. At a glance, its rating system gives you insight into a provider’s forecast of being able to handle its insurance obligations.
The Hartford is an insurance company that has been around even longer than AM Best. It sells small business insurance for dozens of different industries, offering nearly every type of insurance policy you would need. Plus, its AM Best rating is A+ (Superior). You can start a quote online in just minutes.
