How do the AM Best auto insurance ratings work?

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Here's what you need to know...
  • AM Best auto insurance ratings evaluate insurance providers on their financial strength
  • A.M. Best has evaluated credit ratings of financial institutions, including insurance companies since 1906
  • This is a valuable tool to help consumers evaluate the ability of the various auto insurance companies to pay their claims over the long term

AM Best auto insurance ratings evaluate insurance providers on their financial strength, credit, and ability to meet future claims and other financial obligations.

This is a valuable tool to help consumers evaluate the ability of the various auto insurance companies to pay their claims over the long term.

A.M. Best has evaluated credit ratings of financial institutions, including insurance companies, since 1906.

It was the first rating agency in the United States to evaluate companies for credit quality and creditworthiness. That’s important when you’re buying auto insurance.

That’s important when you’re buying auto insurance. In the event you want to present an auto insurance claim to your auto insurer, knowing they’ve got the resources to pay claims provides peace of mind!

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What type of ratings does AM Best offer?

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AM Best offers financial strength, issuer credit, and debt ratings. A.M. Best reviews the auto insurance provider’s financial statements and evaluates how much money and financial resources the company has on hand.

For example, an auto insurance company may earn almost all of its revenues from the sales of auto insurance policies and the collection of auto insurance premiums.

The company may have a little or a lot of outstanding debt, or bills it owes to others. If your auto insurance company doesn’t have enough money to pay your auto insurance claim when you need them, you’ll get in line with many other creditors with claims owed by the company.

Chances are if your auto insurance company becomes insolvent in the near future, A.M. Best’s auto insurance ratings offer a kind of first warning.

A.M. Best also offers a financial strength rating that’s based on an assessment of the insurance company’s ability to meet its auto insurance policy obligations and business-to-business agreements.

A.M. Best also assigns a debt rating about the company’s ability to repay debts to financial security owners issued by the company when they become payable.

Because debt (loans made to lenders called bondholders) may make up a significant portion of the company’s balance sheet, the ability of the insurance company to make timely payments is important to its credit rating.

Of course, A.M. Best can’t guarantee its credit, debt, or financial strength ratings.

Like other nationally recognized statistical rating organizations, the company’s financial analysis depends upon information it receives from the insurance company or from reports filed with regulatory agencies.

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How do I understand the AM Best rating system?

Once you know the three categories for ratings, you just need to understand the simple ABC rating system the company uses. It’s a bit like a report card grade.

For example, in the financial strength category, an A+ to B+ relates to a financially strong company. Anything else means that the company is vulnerable. You should only purchase auto insurance coverage from a financially secure company.

Specifically:

  • Secure
  • A+ ratings are superior
  • A or A- ratings are excellent
  • B+ ratings are good
  • Vulnerable
  • B or B- are fair
  • C+ ratings are marginal
  • C and C- ratings are weak
  • D ratings are poor
  • E ratings mean that the company is under regulatory supervision
  • F ratings mean that the company is in liquidation
  • S ratings mean that the company has been suspended

Which financial information does A.M. Best use to analyze an auto insurance company’s financial stability?

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According to A.M. Best, the auto insurance company’s balance sheet first receives a thorough evaluation to identify financial strength and operations performance. As A.M.

Best’s financial analysts review the auto insurance company’s financial information, it is compared for quality and quantity against other auto insurance companies.

In that way, A.M. Best hopes to compare and contrast all auto insurance providers with the same standards.

More than 100 financial tests are performed to identify the strength of the auto insurance company. The kind of auto insurance the company writes is taken into consideration.

For example, an auto insurance company writing standard auto insurance usually requires lower financial reserves than a company seeking to insure “high risk” or nonstandard drivers.

The organization’s structure (where it’s headquartered; where it has regional offices; how many people it employs; and how it markets auto insurance policies) is considered.

A.M. Best also considers changes in economic or regulatory conditions. Declining financial reserves, market value, sales, and net income may negatively impact A.M. Best’s rating of the auto insurance company.

What other grades does AM Best give?

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If you look at the issuer credit grades you’ll see things like AAA or BB.

All you need to know is that aaa indicates the strongest or an exceptional rating.

In decreasing order of strength:

  • AAAmeans exceptional
  • AA means superior
  • A means excellent
  • BBB means good

These are all considered investment grades ratings. You want to avoid anything below these marks.

The AM Best debt ratings are a bit more complex. Just look at whether the future outlook is positive or negative.

How else can I use the AM Best rating system?

For example, you request auto insurance rate information from a company with a “B+” (“Good”) rating. You also request an auto insurance quote from several insurance companies with “A” or better ratings (“Excellent” to “Superior”).

You’re surprised when the company with a “B+” presents a more expensive quote than the insurance companies with higher A.M. Best ratings.

Of course, that’s not always the case. Some auto insurance companies with a “B” or better rating may offer a lower rate than auto insurance companies with the potential for greater financial stability, according to A.M. Best.

It’s your choice to accept an auto insurance company with lesser financial credentials in exchange for less expensive premium rates.

You would probably choose not to do business with an auto insurance company charging more with less financial stability!

Most consumers these days want to get the most for their money. It’s easy to save money on auto insurance! Enter your zip code in our FREE comparison tool below!

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