What is 'S&P Claims Paying Ability Rating'

A letter grade, known as the S&P claims paying ability rating,  signifies the likelihood an insurance company can pay claims to its customers. This rating from S&P Global Ratings tells existing and prospective policyholders how financially strong an insurer is.

Health maintenance organizations (HMO) and similar health plans also receive S&P claims-paying ability ratings.

BREAKING DOWN 'S&P Claims Paying Ability Rating'

Consumers should not view the S&P claims paying ability rating as an indicator of a company's suitability for their needs or the company's likelihood to deny claims. The score only indicates whether the insurer has sufficient liquid assets to pay claims.

The strongest S&P claims paying ability rating is AAA (extremely strong). Just below that are AA (very strong) and A (strong). The lower the insurer’s score, the more likely that adverse business conditions will damage its claims-paying ability. BBB is also considered a good rating. Below BBB, companies are thought to be vulnerable in a manner that may outweigh their strengths. 

The S&P warns consumers to avoid buying policies from insurers rated at BB or lower. Still, other rating agencies advise against purchasing a policy from an insurer whose rating is less than an A-.

Adding a plus (+) or minus (-) to ratings from AA to CCC allows the comparison of one insurer’s strength relative to another in the same rating category. The worst strength ratings is an R, meaning the company’s financial condition has deteriorated to the point that it is under regulatory supervision. Scores of SD or D, 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 they remain strong.

Other Claims Paying Ability Rating Agencies

The S&P is one of four companies that rate the financial strength of insurance companies. Other rating agencies include A.M. Best, Fitch, and Moody’s. Each agency has its rating scale and a various number of rating categories on which it grades an insurer.

As consumers compare ratings from various agencies, it is well to keep in mind that while they may appear the same, the score will have different meanings from different agencies.

Each agency may evaluate an insurer’s financial strength differently. Consumers are advised to review the opinions of at least two rating agencies. The score should come directly from the rating agency, not from the insurance company. The ratings advertised on insurance companies’ websites may be outdated or paint an overly favorable picture. For example, an insurance company’s marketing materials might only contain Moody’s rating because that rating is the highest and omit the lower A.M. Best rating.

Factors Considered to Determine Claim Paying Strength

Rating agencies weigh many factors in the evaluation of an insurer’s financial strength. One of the most critical elements to the consumer is the company's potential exposure to catastrophic events with the possibility of numerous, simultaneously filed, claims which would strain the company's ability to pay.

Other graded factors include the market position in the country of operation, existing regulatory challenges, and current interest rate impact on the insurer's finances. Additional considerations include a company’s capital adequacy ratio (CAR), annual company earnings, yields on investments, liquidity, and sales growth.

  1. Insurance Company Credit Rating ...

    An insurance company credit rating is the opinion of an independent ...
  2. A.M. Best

    One of the established ratings agencies recognized by the SEC. ...
  3. Insurance Premium

    An insurance premium is the amount of money that an individual ...
  4. Insurance Defense

    Insurance defense refers to Attorneys who focus on representing ...
  5. Catastrophe Equity Put (CatEPut)

    Catastrophe equity puts are used to ensure that insurance companies ...
  6. Claims Adjuster

    A claims adjuster investigates insurance claims to determine ...
Related Articles
  1. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  2. Insurance

    How an Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  3. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  4. Insurance

    5 Tips For Getting The Right Contents Insurance

    There are many options when it comes to insuring the contents of your home.
  5. Insurance

    12 Car Insurance Cost-Cutters

    If car insurance costs are dragging you down, use these tips to free yourself from some of the extra weight.
  6. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products. Insurers can deny coverage in many different instances:Non-Renewal ... Read Answer >>
  3. How are open market operations and monetary policy related?

    Understand the meaning of an aggregate limit in an insurance policy as well as which types of insurance companies are most ... Read Answer >>
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center