Disclaimer: We normally only run articles aimed at Insurance Professionals, not the insurance buying public. We made an exception on this one because it includes a solid explanation of insurance companies financial strength ratings and it makes a call to action for the insurance industry. We will continue to focus almost exclusively on articles for insurance professionals, not the insurance buying public.

 

The Confusing Nature of Financial Strength Ratings

By Scott W Johnson

 

There are many pearls of wisdom as it relates to purchasing life insurance.  What type of insurance to buy, how much coverage to get, etc.,  but one of the hidden considerations is to focus on the company’s Financial Strength Rating.  As many of us saw during the last financial crisis, not all financial companies are as sound as they market themselves to be.  

When buying any life insurance product of a longer duration, especially a Whole or Universal life insurance policy, you would think that the financial strength rating would be the most important thing that an insurance agent would discuss with their potential client.  However, many insurance agents seem to barely bring up the subject.

It begs the question am I really being sold this insurance product for the rest of my life, or until your commission check clears?

Do insurance agents not bring up Financial Strength Ratings because of lack of knowledge or because they are afraid?  Perhaps they are confused and, honestly, I can’t blame them.

 

Where the Confusion Begins:

First off, just the term Life Insurance Rating can refer to any number of types of rankings of a given insurer. It could refer to their Consumer Reports Ranking, or their JD power rating, or even their State Regulating Agency, such as the California Department of Insurance Life Insurance Complaint Study.  However, the Life Insurance Rating really should just apply to their financials, probably not their consumer reviews.

 

To Begin With – What is a Financial Strength Rating:

A financial strength rating is a credit rating agency’s opinion of a given insurers ability to meet its current and future claims and other obligations.  Put very simply – will the insurance company be able to send me a check if my house burns down.

 

Where the Confusion becomes Scary:

FSRs, an abbreviation of Financial Strength Ratings, are written on given corporate entities, but insurance corporate structure sometimes makes is all be impossible for a consumer to understand what company to reference. Do you remember your insurance training on the differences between Reciprocals and Mutuals?  Basically many insurance companies are written along structures that almost require an advanced business degree to understand. If you don’t believe me, look up both Prudential Annuities Life Assurance Corporation vs. Prudential Financial Inc., its parent.  As of November 2017, there is a two grade differences (from A+ to A-) between the parent and child.

 

Next Up, Wall Street What?

In the world of insurance, consumers commonly confuse an Insurer’s Credit Rating with their Financial Strength Rating.   They are similar but not the exact same.  Credit ratings deal with an insurance companies’ ability to pay back debts while FSRs focus on an insurers ability to meet claims.   You can understand the confusion – after all, Financial Strength Ratings are written by Credit Rating Agencies.

Credit Rating Agency AM Best, the leader in rating insurers, does perform both Financial Strength Rating evaluations AND Issuer Credit Ratings.  There are three other main Credit Raters that issue Financial Strength Ratings as well: S&P, Fitch, and Moody’s.

For consumers, typically they should focus on the Financial Strength Rating.

FSRs really have a few different components.  The first component is the actual rating and the second is the size category of the insurer.  For AM Best the rating is done with a letter grade and potentially a plus or minus.   Confusingly they also choose in certain situations to add a double plus as in ++.   AM Best also has a series of Non rating symbols for insurers that are not analyzed for a full variety of reasons. The Category Size of the insurance company is also rated, but with a Roman numeral, such as X.  Therefore a complete AM Best Financial Strength Rating for a given insurer may be listed such as A+, XV.

However this is not the end of the information presented on a given insurer.  Consumers are also met with a gaggle of other information such as their “Outlook” or “Action.”

The other three rating systems from the other rating agencies each have their own independent financial strength rating systems which means that its not easy to compare one FSR from one rating agency vs another FSR from a different rating agency even when its done on the exact same insurer.

 

Feel Confused Yet?

Most consumers do.  The Credit Raters and Insurers make the system extremely complicated and hard to understand.   Often consumers just throw their arms up in the air assuming that an “A” rated carrier is the best there is, not knowing that it is two notches below the highest rating from AM Best.   After all, when is the last time you scolded your child for coming home with an A?

Or, sometimes, wily insurance agents suggest to unknowing clients that an insurer that ‘only’ carries an “A+” FSR might not be a good enough insurer to provide them with a ten year term policy, even though it’s just one notch from the top.  Just to hammer this point home, according to AM Best an A+ rated carrier only had only a .89% chance of being liquidated after ten years, in a study done from the time period 1977 to 2015.   All insurance professionals should be aware of the backup of the State Guarantee Funds that may kick in at that point.

 

A Question of Access:

In order for consumers to really see FSRs they are required to create an account and login to one of the four rating agencies that do Financial Strength Ratings.  To my knowledge each rating agency requires you to create an account with them.   AM Best, the easiest of the bunch, still requires a cumbersome login each time you wish to check a financial strength rating.  In the wake of this obstruction, consumers are often left relying on insurance agents, outdated corporate press releases, or google to tell them bits and pieces of information. Does this sound wise?

 

How Best to Use Financial Strength Ratings for Life Insurance in the World We Live In – for Consumers

The first thing to do is to always check the Financial Strength Rating of any insurer you are considering purchasing a life insurance policy from.  

The Second thing to know about financial strength ratings is to compare one insurer vs another insurer with the same rating agency.  Do not mix and match.  Focus on the Financial Strength Rating more than the Credit Rating.

Third, speak with your agent about the importance of the rating based on the type of policy that you are buying and your overall underwriting situation.  Obviously it’s always advised to get a highly rated insurer, but suggesting to term life policy holders that an A rated carrier is not good enough probably makes little sense.  Also if you have a more challenging underwriting situation you may need to accept a lower rated Life Insurance Company.

Fourth, knowing nothing else about a given clients situation, there are dozens and dozens of A rated carriers available in most states, therefore buying any life policy that is not at least A- or better may not be in your best interest.

Fifth, it may be difficult to understand a given insurers corporate structure.  You may want to ask your agent what carrier will be listed on the actual policy.   Believe it or not, many insurance companies’ products are confusingly marketed under different names and this may require a little extra effort on your part.  Ask lots of questions about the corporate structure to ensure that you understand the Financial Strength Rating that may apply to your policy.

Sixth, don’t let anyone tell you that the rating does not matter. It does. It matters a whole lot.

 

A Plea to Our Industry:

Since I can pretty much guarantee you that less than 50% of insurance agents understand the financial strength rating system, I can assure you the proper information is certainly not getting to most consumers.     

I dislike holding a federal government agency up as a great example, but even FEMAs flood zones are easier to understand than Financial Strength Ratings for insurance consumers.

Yes, I realize that there are a handful of insurance companies whose sole selling method is to brag about their financial strength rating.  But even their use of the system can be questionable at times as well.  How many consumers really need an A++ Whole Life Policy?

Wouldn’t it be great if consumers could access and understand a simple rating system based on the product they are buying – a system that was clear, simple, and did not require an insurance agent or an MBA to explain it to you?

 

California Department of Insurance Life Insurance Complaint Study.  

https://www.insurance.ca.gov/01-consumers/120-company/03-concmplt/