S&P Claims Paying Ability Rating

DEFINITION of 'S&P Claims Paying Ability Rating'

A letter designation that signifies the likelihood that an insurance company will be able to pay the claims its customers file. The claims paying ability 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'

The S&P claims paying ability rating is not intended to advise policyholders about the suitability of any particular insurance policy or about how likely an insurer is to deny claims for reasons such as alleged fraud. It only indicates whether the insurer has enough 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 rating gets, the more likely that adverse business conditions will hurt its claims paying ability. BBB is still considered a good rating, but below that, companies are considered to be vulnerable in ways that may outweigh their strengths. S&P states that consumers should avoid buying policies from insurers rated BB or lower. Other rating sources indicate that consumers should not buy a policy from an insurer whose rating is lower than an A minus.

A plus or minus sign may be added to ratings from AA to CCC to show one insurer’s strength relative to another in the same rating category. The worst ratings are R, meaning that the company’s financial condition has deteriorated to the point that it is under regulatory supervision, and SD or D, meaning that the insurer is likely to default on some or all of its policy obligations. In addition to checking ratings before purchasing a policy, consumers should review their insurers’ financial strength ratings annually to ensure they remain strong.

S&P is one of four companies that rate the financial strength of insurance companies; the others are A.M. Best, Fitch, and Moody’s. Each agency has a different rating scale and a different number of ratings categories. Two ratings that look the same will have different meanings depending on which rating agency they come from. Further, each agency may assess an insurer’s financial strength differently, so consumers should evaluate at least two rating agencies’ opinions of their insurance company and not rely on a single agency’s opinion. Consumers should obtain the rating directly from the ratings agency, not from the insurance company, as 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 that are evaluated in considering an insurer’s financial strength include its market position in the countries where it operates, regulatory challenges, the effect of prevailing interest rates on the insurer’s finances, the company’s capital adequacy ratio (CAR), the yields of the insurer’s investments, the insurer’s earnings, the insurer’s liquidity, its sales growth and the potential for catastrophic events that could result in large numbers of claims being filed simultaneously, requiring the insurer to pay out numerous claims in a short time.