AM Best Ratings: What Do They Mean and How Do I Evaluate Them?

We are getting a lot more questions regarding carrier stability and how performance is being monitored outside regulatory agencies, given the current turmoil in the financial market. AM Best Company was established in 1899. It is the oldest and best-known rating agency for the insurance sector. AM Best is a key indicator of financial strength in the industry and covers all business lines. AM Best not only monitors the state of the domestic insurance market but also monitors international carriers.

AM Best is generally considered to provide a strong indicator about the financial health and stability of an insurance company. However it should not be used as a sole measure of a carrier’s financial strength when evaluating them. It is important to consider other rating agencies including, Standard & Poor’s, Moody’s, and Fitch. AM Best will often be more concerned with an insurer whose rating agencies have downgraded it.

AM Best uses two symbols to indicate its rating analysis:

The first is the financial strength rating, which can be represented alphabetically as A++ or E. It provides a detailed quantitative and qualitative analysis of a company’s balance sheet strength, operating performance, and business profile.

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The Financial Size Category is the second symbol. It’s numeric. This symbol is used to indicate the company’s size. It is calculated using the carriers reported policyholder surplus and conditional or technical reserves funds. Each company has a roman numeral that can be used to identify it. It can be anything from roman number 1 (less than $1,000,000) up to roman number V (greater than $2,000,000,000).

Most insurance companies have an alphabetical rating A- (Excellent or higher) by AM Best. There are some companies that fall in the B++ range, but they are still considered excellent by AM Best. AM Best considers a carrier with an alphabetical rating below B to be vulnerable. The final category they offer is E. A carrier with this rating is subject to Regulatory Supervision. At Parker, Smith & Feek, Inc our minimum acceptable Best Rating is A- V.

AIG’s Best Rating was A+ XV up until recently. AM Best has reviewed and/or changed their rating depending upon what was going on with the company. AIG currently holds a Best Rating A XV. This rating is still considered very strong. We monitor carrier ratings closely and advise our clients as necessary.

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What does all this mean?

The question that business owners ask is how can they be certain that the insurance company which provides our insurance will continue to exist five-years from now? It is hard to predict the future, but understanding and understanding the AM Best rating system is an indicator. Your Broker should help you identify the most financially sound carriers for your company and then determine if they are the right fit. You should have multiple options and strong carriers to choose from, as your broker will be providing them with alternatives.

A second question is how confident we are in any regulatory agency given the current financial crisis. AM Best has worked hard in providing an independent evaluation on an insurance carrier’s operations, and we still rely upon their ratings. To get the complete picture, it is important to combine their ratings with those of other rating agencies.

We recommend that all subcontractors and vendors you employ must be able to show evidence of insurance from their broker. This should include proof of insurance using insurance companies with AMBest ratings A – V or higher. They should also indicate the Best Rating on their certificates. This is located in the upper right-hand corner.

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Your vendors should be working with insurance companies that meet your specific requirements. This includes those recommended by your broker and reviewed with you and any outside entities that have AM Best requirements. You should ensure that your vendors are working with stable insurance companies. If their carriers fail your insurance will be responsible for any claims that could arise as a result.

Remember one last thing. Make sure to know the minimum AM Best requirements of your lender and whether your proposed or current carrier meets them when evaluating your carriers AM Best rating. It is a good idea to review this every year with your broker.