Insurance Company Ratings

By Steven H. Kobrin, LUTCF
November 9, 2004
Copyright © Steven H. Kobrin, LUTCF.
All rights reserved.

In part one of our insurance ratings guide, I provide a list of the major insurance company ratings firms. Now, let's consider the purpose of insurance company ratings. Namely, what can ratings tell us?

The Purpose of Insurance Company Ratings

Financial Strength

Insurance company ratings can give a good indication of financial strength, which is an important factor when selecting a life insurance company. Rating firms perform the complex and in-depth analysis of insurance companies that is necessary for assessing their strength.

However, consumers should not rely on ratings alone if a thorough and complete assessment of a company's strength is desired. In addition to ratings, consumers should consult company reports that provide additional insights into a company's financial strengths. These reports are not within the scope of this guide; consumers may purchase them directly from the rating firms.

It is important to recognize that a high rating is not a guarantee that a company will survive—or even prosper. At the same time, a low rating is not a guarantee that the company will fail.

Regulators

As of 1991, when Executive Life of California was taken over by insurance regulators, the ratings of insurance companies have become an essential issue. Since that time, a number of other life and health companies have been taken over by regulators.

As I understand it, when a company is taken over by a regulator, the objective is to rehabilitate or sell the company, as opposed to liquidating the company. An overriding concern is to keep all policies in force. That is why—when Mutual Benefit of Newark, NJ, was taken over by regulators—other companies including Prudential and Met Life took over their policies.

Comfort Zone

The bottom line to me is that a rating firm's opinion about the financial strength of an insurance company is an indication of the likelihood of that company succeeding or failing. It should be used by the consumer to get into a "comfort zone" about the company.

And it should be remembered that—if a company unfortunately fails—both the industry and the government will make a determined effort to meet the obligations to all policy holders.

Next, let's see how rating insurance companies helps us get into our comfort zone.