It is no longer news that companies require ratings to assess their creditworthiness and insurance companies are no exceptions. Insurance companies are also subject to financial ratings that assesses how financially stable they are.
It is important to consider an insurance carrier’s financial strength and capability before purchasing coverage, because insurers have an ongoing financial obligation to the insured. This gives a foreknowledge of the insurance company’s ability to pay claims, especially in times of financial strain.
Credit rating of insurance companies might not be too common in this part of the globe, but it is the norm in some well-developed countries. Credit raters usually consider a wide variety of factors, but basically assess how well the business performs financially, how efficiently it is being operated and inherent factors such as vulnerability to natural disasters.
Since there are different types of insurance companies, the criteria used in rating them may differ based on the exact type of insurance. For instance, a factor considered material for a life insurance company might be immaterial for a health or home insurance company.
The financial strength of an insurer answers questions such as but not limited to: How well is the company able to withstand a struggling economy? Are the rate of claims increasing to the extent of causing a financial crisis?
Criteria like the cash reserve and profit retention of the company are also not left out when determining the financial health of an insurer. Other common rating factors could include the amount of cash in hand, the diversity of revenue portfolio, risk management system in place, the financial leverage, quality of insurance policies, and whether the company operates in line with regulatory framework.
Far from an insurance carrier’s financial stability, the complaint base index is also one of the major things credit raters need to look into. This translates to the overall quality of service in terms of how many complaints the insurer has received, compared to the amount of insurance it sells. Of course, no company is without fault or mistake, but more complaints may signal the insurer’s inability to provide adequate and satisfactory services.
Every rating agency has its own methodology and rating scale; therefore, ratings sometimes vary among insurance companies. Nevertheless, all credit raters base their final ratings on virtually the same data. Consequently, if an insurer is issued an extremely different rating from one rating agency to another, further research should be done to know the reason for the disparity.