Insurance company ratings evaluate an insurance company’s financial performance by a third party, based on rigorous qualitative and quantitative analyses of the company’s balance sheet, operating performance and volume of business. Though an insurance company rating cannot be regarded as a warranty of a company’s capacity to meet its financial obligations, they provide a yardstick to compare the respective strengths of insurance companies operating internationally. As of now, there are five major firms providing authentic ratings in the insurance sector: A.M. Best, Standard & Poor’s, Weiss Ratings, Fitch Ratings, and Moody’s Investors Service.
Insurance Rating Firms and the Fluctuating Market
These firms assign financial strength ratings to health insurance carriers, including traditional life/ health insurance companies, health maintenance organizations (HMOs) and Blue Cross and Blue Shield plans. The methodologies in determining the ratings are constantly updated to reflect changes in the insurance market.
This is essential because the insurance company market is volatile and faced with rising inflation, healthcare costs are skyrocketing, which makes operating environments very unpredictable for health and life insurance companies in particular. This means that insurance carriers may fail to anticipate a rise in healthcare costs at the time of calculating the price of the insurance policies. This leads to a cut in earning potential as well as a lower degree of capitalization, both of which can combine to ultimately cause financial setbacks for a company.
Obviously, small insurance companies are more affected by the volatile characteristics of the insurance market. These companies often exhibit a narrow geographical concentration both in their areas of operation as well as types of insurance policies. Given their limited resources, they are unable to respond quickly and efficiently to changes in the market, which makes them prone to financial damage owing to market fluctuations.
How the Rating System Helps Consumers and Companies
The financial insurance company rating system helps consumers assess the financial status of insurance companies as well their ability to meet current financial obligations. With increasing awareness among customers regarding the correlation between political and economic instabilities and the operations of a company, the company rating has become an even more significant factor in an insurance buyer’s decision. Essentially, ratings empower a consumer to take an informed decision, because ratings build up a database comprising information regarding the financial status and performance of organizations not just in the US but all over the world.
From a company’s point of view, a financial rating by a well-known rating firm is part of its marketing strategy to gain customer confidence. It also upholds the company’s image before probable investors and helps raise the company’s stock value. Moreover, it becomes easier for new insurers to penetrate the market if they are armed with a rating from an authentic rater like A.M. Best. A high rating thus adds to the asset value of insurance companies.
Small insurance operators also benefit from the insurance rating system in a variety of ways. For one thing, it gives them an idea of the financial strength and extent of operation of a particular insurer and helps them compare performances of various insurers. It also helps them assess future reinsurance accounts. On the basis of ratings, the insurance agents decide which of the policies should be marketed in a broader way.
Check Ratings Now for Your Next Policy
The insurance company rating system is founded on the basic philosophy of detection and prevention of insurer insolvency. If you are policyholder, or planning to become one, it is important for you to check the rating of your insurer. Companies with high ratings are in a healthy financial position and is able to comfortably disburse claims. A low rating means you have to tread carefully before you buy an insurance policy from that company.