Life Insurance Company Rating

The essence of insurance – life insurance or any other form - is the substitution of cost for risk. Individuals transfer risks to insurance companies, who assume risks by contractually agreeing to make contingent payments to individuals or their heirs. The value of insurance contracts depends crucially on the ability of insurance companies to make the payments stipulated in the contracts. In turn, their payout ability depends on their financial strength.

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It is not surprising that competitive financial markets have spawned agencies to rate the financial strength of life-insurance companies. The ratings supplied by these agencies enable consumers of life insurance to choose sound companies among whom to distribute their patronage.

The Major Life Insurance Company Rating Agencies

There are four companies that are generally considered to be the major life-insurance company rating agencies. They have been designated as National Recognized Statistical Reporting Organizations (NRSROs) by the Securities and Exchange Commission (SEC). In addition, a fifth company has earned the right to be considered on a par with the four majors. Each company has its own alphabetical rating method for ranking insurance companies, which is a source of perennial confusion for insurance consumers. Fortunately, it is not necessary to possess expert knowledge of business analysis or insurance-company ratings or even the alphabetical systems used by the ratings agencies in order to derive value from insurance-company ratings.

The four leading companies are A.M. Best, Standard & Poor’s, Moody’s and Fitch. A.M. Best is the oldest and most famous analyst of the insurance industry. It dates back to 1899. It is the company whose ratings are most often cited by observers and independent sources. The other three companies have long been involved in general business reporting. Standard & Poor’s, world-famous for its S&P 500 stock index, has been the world’s leading business-credit rating service for over a century. It has operated since 1860. Moody’s has been a leading credit analyst and the world’s foremost bond-rating agency since 1909, before recently branching out into life-insurance rating. Fitch, a business advisory firm operating since 1913, acquired Duff & Phelps Credit Reporting in 2000.

The fifth leading ratings agency is Weiss Research, started in 1971. Weiss began business life as something of a business gadfly, insisting that industry standbys such as A.M. Best were getting by on their reputations and catering to the largest and most influential firms rather than doing the hard work of identifying chinks in the armor of the insurance industry. Over the years, Weiss Research has gradually fought its way to the top of the insurance-rating heap. The federal government’s Government Accounting Office (GAO) found that, during the 1990s, Weiss Research outperformed the four majors in identifying failing insurance firms. More recently, Weiss Research predicted failure for Fannie Mae, Bear Stearns, Lehman Brothers and CitiGroup well before competing analysts.

Rating the Top Life Insurance Companies

The techniques used by these companies are similar to those employed by a securities analyst following a stock on Wall Street. They examine the company’s sources of cost and revenues, its assets and liabilities in order to determine its ability to perform its core functions, satisfy its creditors, its consumers and succeed as a going business concern. Their evaluation is both current (how is the company doing now?) and prospective (what are its prospects for the immediate future?). That last point is of particular importance. A life insurance policy is almost always intended to last at least five years and will often be expected to last a lifetime. In evaluating the work of the evaluators, the simplest and easiest technique is to examine the criteria they set for their highest awards.

The characterization placed by A.M. Best on its top 6 life-insurance company rating designations (ranging from number one, A++, to number six, B+) is “Able to meet its insurance obligations.” This is exactly what the policyholder is looking for in an insurance company; anything less in unacceptable. Consequently, the life-insurance consumer should never choose a company with an A.M. Best rating below B+. Similarly, the fourth S&P rating category begins to talk about vulnerability to adverse economic conditions, while the fifth category, BB, is “Adverse business conditions may lead to inability to meet obligations.” Thus, the consumer should avoid companies that are rated BB or lower with S&P. Likewise, Fitch’s fifth category, BB, is the beginning danger point: “Contractual obligations are now vulnerable.” Moody’s fifth rating, Ba, is “Ability to meet obligations is questionable,” which sets the standard for consumer avoidance in its rating system.

Doing It All on One Website

It isn’t necessary to visit five different websites in order to gather the necessary ratings for a particular insurance company. A good ratings website, such as Company Ratings can not only provide all the ratings information you need on the four major ratings agencies but can also serve up term life insurance quotes from fifty of the highest-rated life-insurance companies.

To find the best life insurance products request a free, comprehensive quote comparision. Secure your future today, Get Started Now.