When arranging insurance, you may have noticed that the different insurance providers have ‘ratings’. These ratings are in place to provide brokers like us, and our insurance clients, greater knowledge of the standard, performance and competency of an insurance provider so that a more informed decision can be made when it comes to making a selection. In this post we will be exploring insurance ratings in detail, explaining how the ratings work, why they are so important and the risks of using a poorly rated or unrated insurer.
How do insurance ratings work?
Insurer ratings are based on financial or credit ratings. These are independent evaluations of the ability of the insurer to meet their financial commitments, in particular, their ability to pay out on claims.
Financial strength ratings in the insurance sector are provided by credit rating organisations, the most respected of which include Standard & Poor’s (S&P), Moody’s, Fitch and AM Best. Each has its own ratings system which we will now take a look at in more detail.
Standard & Poor’s
Founded in 1860, Standard & Poor’s is a leading index provider and data source of independent credit ratings.
S&P’s ratings range from AAA to D, with AAA being the highest possible rating. An AAA rating demonstrates that the insurer is able to maintain credible financial performance, and has the ability to repay all debts. A rating of D would indicate that an insurer is in default on its financial commitments.
AAA – Extremely strong
AA – Very strong
A – Strong
BBB – Adequate
BB – Less vulnerable
B – More vulnerable
CCC – Currently vulnerable
C, CC – Highly vulnerable
D – In default
Moody’s Investors Service
Moody’s Investors Service is an American credit rating agency providing international financial research on bonds issued by commercial and government entities.
Moody’s ratings range from Aaa to C, with Aaa demonstrating a low credit risk, and C showing that the insurer is in default with little prospect of recovery.
Aaa, Aa, A – Low credit risk
Baa – Moderate credit risk
Ba – Substantial credit risk
B – High credit risk
Caa – Very high credit risk
Ca – In or near default
C – In default, little prospect of recovery
Fitch Ratings Inc.
Fitch Ratings Inc. is an American credit rating agency relied upon by investors seeking reassurance as to which investments will not default.
Fitch ratings run from AAA which indicates the highest credit quality, through to D which shows an insurer is in default.
AAA – Highest credit quality (exceptionally strong)
AA – Very high credit quality (very strong)
A – High credit quality (strong)
BBB – Good credit quality (adequate)
BB – Speculative (vulnerable to default risk)
B – Highly speculative (default risk is present)
CCC – Substantial credit risk (default is a real possibility)
CC – Very high levels of credit risk (default appears probable)
C – Near default
RD – Restricted default
D – Default
AM Best is the only global credit rating agency with a unique focus on the insurance industry. The company’s credit ratings are a recognised indicator of the financial strength and creditworthiness of insurance providers.
Best’s ratings run from A++ which indicates a superior financial status, through to D, which indicates a poor position.
A++, A+ – Superior
A, A- – Excellent
B+, B++ – Good
B – Fair
C+, C++ – Marginal
C, C- – Weak
D – Poor
Why should policyholders be concerned with insurer ratings?
The better the financial rating of an insurer, the more likely it will have the financial stability to meet its financial commitments, such as paying out on valid claims.
Financial stability is vital amongst insurance providers, especially those who provide long term cover like warranties that can last for 10 years or more.
As you can imagine, if an insurer was not in a position to pay out on a claim, this would put the policyholder in a very precarious position.
Insurers that are facing financial difficulties pose a major risk for policyholders, in that if they were to go into liquidation, they could leave policyholders uninsured and facing the prospect of having to find alternative cover at short notice.
Where an insurer is regulated by the Financial Conduct Authority (FCA), should they be unable to meet the costs of claims, some of these costs may be met by the Financial Services Compensation Scheme (FSCS).
Are all insurers rated?
If an insurer lacks a financial rating, then an independent evaluation of their financial position has not been carried out. For the policyholder, this will leave them uncertain as to whether the insurer will be able to meet a future claim.
It is impossible to guarantee that any insurer, regardless of its rating, will be resistant to failure; however an insurance provider with no rating whatsoever will present the greatest risk to a policyholder.
What are the risks of using an unrated insurer?
Unrated insurers carry a number of risks. Firstly, there is no verification as to their financial strength, which means uncertainty for policyholders. Secondly, unrated insurance providers could prove difficult to get in touch with should there be a problem.
It is also important to recognise that insurance providers situated outside of the United Kingdom will not be subject to the same regulations and legislation that is in place to protect policyholders in this country. The same goes for non-European Economic Area based insurance providers and EEA regulations and legislation.
Insurance Broker Due Diligence
As an insurance broker committed to the satisfaction and security of our clients, Robert Gerrard will always verify the financial rating of all insurance providers with which policies are arranged. Placing cover with insurers with the strongest financial ratings is our key policy.
Chubb European Group SE for example, our scheme insurer for 15 years, is rated AA with Standard & Poor’s, and A++ with AM Best.
Should you have any questions about the rating of an insurer with which you hold a policy arranged by Robert Gerrard, you are welcome to get in touch with your regular contact for individual advice.