AM Best Rating information: How are they determined?The insurance market is one of the most volatile in the industry. Financial ratings of an insurance company helps customers make informed decisions. Ratings give customers an idea of the financial status of a company and its ability to disburse claims. There are many firms that assign financial ratings to insurance companies. Of these, A.M. Best is the oldest ratings provider with a huge client base that spans worldwide.
A rating is awarded on the basis of rigorous research on various qualitative and quantitative aspects of the insurance company. The data is gathered through complex techniques that vary with different rating firms. However, some common operational aspects are taken into consideration by most rating agencies. These include financial stability, managemental efficiency, overall leverage, and data on customer satisfaction. These are all internal aspects of the insurance company. However, an insurance company is also vulnerable to the outside environment and that is also taken into consideration. External factors include competitive edge, diversification of products and market presence. On the basis of these findings, rating firms release their analyses and rating scores are determined on the basis of these analyses.
With A.M. Best rating, a rating is calculated on the basis of a detailed evaluation. This evaluation procedure reflects a company's ability to meet its obligations to an insurance policy holder depending on a set of three criteria: balance sheet strength, operating performance and business profile. The rate is defined after comparing these criteria with A.M. Best's qualitative and quantitative standards. The risk factors in the market are also included in the analysis, as are the company's affiliates.
The evaluation process of an A.M. Best rating requires the voluntary supply of confidential as well as public information on the part of the company's management. However, ratings are subject to constant reevaluation to reflect the changes that have occurred during the financial year as well as management decisions and policy implementations.
The A.M. Best rating criteria for rating health insurance and life insurance companies are more or less the same. The only difference is that in the health insurance sector, the emphasis is more on such factors as benchmarks, rations or other qualitative issues typical of the health insurance market.
Balance Sheet Strength
This is the most crucial factor that determines a company's ability to respond to policyholders' obligations. The balance sheet strength of any insurance company is directly proportional to the adequacy of insurer's capital as well as the surplus to sustain its ongoing operations. The company needs to have a minimum amount of capital to continue long-term operations.
Then there are risk factors comprising the company's product type and underwriting, to which the company is constantly exposed. Both of these factors are also taken into consideration at the time of the evaluation. A.M Best rating employs a tool called Best's Capital Adequacy Ratio (BCAR) to evaluate these two factors. Other components for assessing a company's balance sheet are Asset Quality and Reinsurance. In turn, the quality of assets is measured by such standards as exposure of surplus to risky assets, asset diversity, liquidity of assets etc. The Reinsurance Program of a company is also scrutinized to check whether its capital is adequate and proportionate with meeting the risk it has undertaken in the business.
This is the factor that determines the growth or reduction of capital value of an insurance company and
A.M. Best rating evaluates the operating performance of the company on the basis of its stability and sustainability of income. In short, A. M. Best examines the degree of unpredictability in a company's earning and its probable impact on the overall balance sheet strength.
This is particularly important for companies with a higher rating. The business profile reflects on the future operating performance of the company and is influenced by such factors as quality of management, inherent risks associated with the service offerings of the company and the competition it faces in the market.
The A.M. Best rating system is based on a range of authentic data including the company's annual financial report, a specific questionnaire and many more sources. The agency has been consistent in providing policyholders with the truth about the strength and stability of a company and is today respected for employing the most scientific criteria in the industry.