AM Best Ratings — What do they really tell you?

When you shop around for home, life, or auto insurance quotes, insurance agents or company representatives often tell you their insurance company’s AM Best rating, to convince you it is a good insurance company. But what is the AM Best rating, and what does it really tell you about an insurance company? Should you use it to pick a better company, by choosing a company with a higher AM Best rating? This blog post will tell you what you need to know!

What is the AM Best rating, and what does it tell you about an insurance company?

First, let me explain what the rating does NOT tell you: The AM Best rating is not a measure of customer service, or how good the company is at handling claims. If you want to know about an insurance company’s customer service, click the link below.

AM Best has several types of ratings, but when it comes to insurance companies, the rating usually referred to is the AM Best Financial Strength Rating, which is defined by AM Best as:

“AM Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.” ( from the AM Best Web site)

AM Best, similar to other insurance ratings agencies, such as Moody’s, Standard & Poor & Fitch, rates an insurance company’s financial strength & ability to pay claims.

You do not want to insure with a company with a low AM Best rating, because the insurance company is having financial difficulties, and may delay paying your claim or go out of business.

However, an insurance company with a very high AM Best rating is financially strong, but that does not mean the insurance company has good customer service, or will not be difficult to work with when filing a claim.

Here are the AM Best ratings grades, from best to worst:

A++, A+ (Superior)
A, A- (Excellent)
B++, B+ (Good)
B, B- (Fair)
C++, C+ (Marginal)
C, C- (Weak)
D (Poor)
E (Under regulatory supervision)
F (In Liquidation)

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Personally, if I am shopping my auto or homeowners insurance, and one company has an “A++” rating, and another company has an “A-” rating, it will not sway me to insure with the company rated “A++,” unless the level of coverage, customer service, claims handling, & price are about the same. I am more concerned with getting a good price, and evaluating an auto or home insurance company’s JD Power customer & claims satisfaction ratings and customer complaint record, which I consider in the ratings I use in the insurance company reviews I publish on my website.

If an insurance company has a “B++” or lower rating, or is not rated by AM Best, proceed with caution. It is rare to find an insurance company not rated by AM Best (I know Homesite insurance is not rated). If you are interested in an insurance company not rated by AM Best, be sure to see if the company is rated by any other rating company, such as Moody’s, Fitch, Standard & Poor, etc., and make sure the unrated company is really the best option for you.

Can you trust the AM Best rating to keep you from insuring with a financially troubled insurance company?

Not really. Remember the financial crisis, when sub-prime mortgage debt received top ratings from rating agencies? AM Best has the same conflict of interest as other rating agencies, such as Moody’s, S&P, etc., because AM Best is paid by the insurance companies being rated, so there is an incentive to be overly optimistic about the insurance company’s financial condition.

There is a rating service called Weiss ratings, which may be more objective, and does not receive payment from the insurance companies it rates. You can find out more about Weiss ratings, and a link to their Web site, by clicking any of the links in this blog post going to my Web site.

An “A” rated insurance company can lose its “A” rating very quickly.

In the early 1990s, I remember Mutual Benefit Life was taken over by the state, because it ran into financial troubles with investments in junk bonds. Mutual Benefit Life had an “A+” rating by AM Best until shortly before its failure.

With life insurance, where you may keep the same policy for decades, or the rest of your life, and may not be able to change to another insurance company due to cost or health conditions, the financial strength ratings of insurance companies are extremely important.

However, with auto & home insurance, switching to another insurance company is fairly easy. If you become suddenly aware your auto insurance or home insurance company is having financial troubles, you should have no problem changing to another insurance company.

What if you have a claim when your insurance company goes belly up? Many states have guaranty funds to pay the claims for insolvent insurers. But the coverage through the guaranty fund may not be as much coverage as provided by the bankrupted insurance company, and making a claim may be an arduous task. Don’t rely on state guaranty funds, and make sure you keep up on the financial strength of your insurance company.

But don’t worry too much. Auto & home insurance companies are regulated and required to maintain adequate reserves in conservative investments. During the 2008 financial crisis, none of the insurance company subsidiaries providing auto insurance or homeowners insurance were at risk of failing. Even AIG, which would have collapsed without government bail outs, had insurance subsidiaries insuring homes & cars with adequate reserves, which continued to pay claims. Had AIG failed, these subsidiary companies would have been sold to healthy insurance companies. In fact, 21st Century insurance, once owned by AIG, was recently sold to Farmers Insurance Group.

A lot of insurance companies charge much more than other insurance companies for the same coverage, but no single insurance company has low rates for everyone. You have to shop with all the leading companies, to find the company with the best coverage and best price for you.

Do you have any questions about AM Best ratings, or opinions on the financial strength of insurance companies? Comment on my facebook page. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.