What Is the S&P Insurer Financial Strength Rating?
The Standard & Poor's (S&P) Insurer Financial Strength Rating system signifies an insurance company's fiscal soundness, and therefore its ability to pay claims made by its policyholders. Health maintenance organizations (HMOs) and other health insurance plan providers also are rated.
The S&P Insurer Financial Strength Ratings have been issued since 1971.
Understanding S&P Insurer Financial Strength Rating
Insurer Financial Strength ratings are used by a variety of professionals in the insurance industry, including insurance brokers who advise clients and government regulators responsible for setting capital requirements for insurers.
Consumers can check an insurer's rating as an indication that the insurer is financially stable and has sufficient assets to pay its claims. The rating cannot be viewed as an indicator of a company's overall quality of service.
The agency has faltered in the past. For example, it awarded insurance behemoth American Insurance Group (AIG) a AA counterparty rating and gave an AA+ rating to the company's core subsidiaries in 2007. "AIG’s very strong capital and earnings have benefited from the diversity afforded by its property/casualty and life and retirement businesses. Furthermore, we don’t have concerns regarding AIG’s ability to retain at least ‘AA’ capital adequacy," it stated.
A year later, AIG had to be rescued with a bailout package from the Federal Reserve. The company survived and repaid its debt.
Insurer Ratings, Good and Bad
The strongest S&P Financial Strength rating for insurers is AAA (extremely strong), indicating that a company has sufficient liquid assets to meet any demands from its policyholders.
Just below that are AA (for very strong) and A (for strong).
BBB is generally considered an acceptable rating for an insurer. Companies rated below BBB are thought to be vulnerable to financial difficulties to a degree that may outweigh their strengths as insurers.
The S&P advises consumers to avoid buying policies from insurers rated at BB or lower. Other sources may advise against purchasing a policy from an insurer whose rating is less than an A-.
A separate category, D/SD, denotes a company that has defaulted on one or more of its insurance obligations but is not under regulatory supervision.
The lowest rating is R, signifying that a company is under regulatory supervision due to its precarious financial condition.
- The S&P Insurer Financial Strength Rating system indicates whether an insurance company has sufficient assets to pay its claims.
- The highest S&P rating is AAA.
- AA, A, or BBB are considered acceptable ratings.
- Consumers can compare an insurer's rating from four sources.
Scores of SD (selective default) or D (default) imply the insurer is likely to default on some or all of its policy obligations.
Consumers should review their insurers’ financial strength ratings annually to ensure that they remain highly rated.
Other Sources of Financial Strength Ratings
The S&P Financial Strength Rating scores only a company's fiscal health, not the quality of its insurance products or services.
Checking at least two of these rating sources is a good idea. It's best to look up the scores on the rating agency's sites rather than relying on the insurance company's own report. The ratings advertised on insurance companies’ websites may be outdated or feature only the highest rating from the four companies.
What Determines Claims Paying Ability
Rating agencies weigh many factors in evaluating an insurer’s financial strength. A critical element is the company's potential exposure to a catastrophic event that leads to many simultaneous claims.
Other graded factors include the company's market position, regulatory challenges, and the current impact of interest rates on the insurer's finances.
Additional considerations include a company’s capital adequacy ratio (CAR), annual earnings, yields on investments, liquidity, and sales growth.
The S&P Global Rating's framework consists of three elements: a business risk profile of industry and country risk, a financial risk profile consisting of risk position and financial flexibility and modifiers, and a support framework that takes into account external factors such as government and geographic conditions.