A.M. Best Insurance Rating Criteria
One of the founding principles of the insurance industry is that customers or policyholders have to be informed about the financial status of the insurance company from which they have bought their policies. This is essential because that knowledge will help a customer decide whether s/he eventually wishes to buy an insurance policy from the insurance company. The equation is simple: financial strength equals smoother disbursement of claims.
This is where A.M. Best insurance rating comes in, because it furnishes customers with information about the financial situation of a particular insurance company. However, a question remains: how does one know that the information one receives from a rating company is authentic and based on scientific techniques?
A. M. Best, the oldest operator in the insurance industry, offers comprehensive corporate profiles and fiscal details on a large number of insurance companies operating all over the world. And scientific methods are involved at every step of the assessment process, which is based on detailed reviews and a whole range of financial data and information. A company is evaluated taking into account factors such as governmental policies, exchange risks, financial reserves, current interest rates and nation-specific insurance regulations. Once the data has been accumulated, the analysis process begins. This phase involves quantitative and qualitative factors like balance sheet strength, operating performance and business profile.
The quantitative evaluation is founded on the financial reports of the company spanning five years. In addition, A.M. Best insurance rating uses over 100 other financial tests and secondary data. Key sources of information are the annual and quarterly statutory financial statements filed with state insurance departments and the National Association of Insurance Commissioners (NAIC). Other sources include audit reports, loss reserve reports, US Security and Exchange Commission (SEC) filings and confidential information supplied by the company management.
An A.M. Best insurance rating analyst team comprises at least one primary analyst and team leader. The analyst team forwards its findings to an A.M. Best rating committee, which then undertakes a review process. After a decision has been taken on the rating, the client company is informed about the decision. The issuer has the option of accepting the rating or appealing against it. In case of a change in rating, A.M. Best will publicize the matter through a press release. In case of an appeal, the issuer team must present valid reasons to consolidate the rating.
Thus an A. M. Best insurance rating is the result of a complex procedure based on a committee analysis comprising senior officers of the executive committee of A.M. Best. The ratings are reviewed annually and in the interim, A.M. Best representatives keep in touch with the company management to track the current performance of the company. Given the exhaustive nature of the process, there is no scope for malpractice or manipulation and we can safely conclude that the ratings provided by A.M. Best insurance rating are completely authentic and scientifically derived.
The highest rating assigned by A.M. Best is A++ or Superior and the lowest is F, which means the company is in liquidation. The companies are also divided into two broad categories — Secure and Vulnerable. This rating is based on A.M. Best’s Insolvency Studies, whereby Secure-rated companies are expected to be at lower risk of failure, while Vulnerable-rated companies obviously run a greater risk. Moreover, the claim-paying ability of a Vulnerable-rated company is restricted only to the current period, whereas Secure-rated companies are capable of rising above fluctuations in the economy and honor their commitments in the long run.