Behind the Score: Unravelling the Mystery of Insurance Ratings – Part 1

In the intricate world of insurance, where choices abound, and uncertainties lurk, the importance of insurance ratings cannot be overstated. These numerical and alphabetical symbols serve as beacons, guiding consumers, investors and regulators through the complex seas of financial stability and reliability. Discourse in this article will delve into the nuanced realm of insurance ratings, exploring their significance, the factors that shape them, and their impact on the insurance industry and its stakeholders.

An insurance rating is a quantitative and qualitative assessment, typically assigned by recognised credit rating agencies representing an insurer’s relative financial strength, creditworthiness and overall risk profile. Simply put, it measures a company’s ability to pay its claims as and when they fall due. The assigned rating is expressed through alphanumeric symbols, often accompanied by modifiers, reflecting the insurer’s capacity to meet contractual obligations to its policyholders and endure economic volatility.

For instance, the world-renowned rating agency AM Best uses a rating scale that ranges from “A++” to “D”. A company rated “A++” has a perceived superior ability to satisfy its insurance obligations to an insurer rated “D”. A lower rating also implies the company is more vulnerable to changes in underwriting and economic conditions.

Every rating agency will apply its unique rating standards and scale. Rating agencies will always produce guides on interpreting the scales and symbols applied. The respective definitions and criteria applied in scoring will also be explained. The guides are freely available on the agency’s website for public use. Because each rating agency utilises a unique methodology, an insurance company may receive different scores from different agencies.

It is worth noting that a rating is an opinion by an independent third party and not a fact. The table below highlights the scores used by some well-known rating agencies worldwide.

Insurance, at its core, is a risk management tool. For consumers, the ability of an insurance company to fulfil its financial commitments is crucial. Ratings rank an insurer’s financial strength, helping policyholders choose companies that can withstand economic downturns and honour their obligations. Insurance companies with higher ratings instil greater stakeholder trust and credibility, fostering a competitive insurance environment.

Regulatory bodies may also utilise insurance ratings as a vital tool for market oversight. These ratings aid in identifying potential risks, ensuring regulatory compliance, and implementing measures to protect consumers and maintain the stability of the insurance industry as a whole.

Similarly, favorable financial strength evaluations from prominent rating agencies are crucial prerequisites for reinsurers. Primary insurers heavily rely on these ratings to gauge the reliability of reinsurers, significantly influencing their decisions regarding placing business with them and to what extent or in what lines of business. Rating agencies such as Moody’s and A.M. Best offer ongoing assessments of reinsurers, evaluating their capacity to fulfill claims on policies and contracts as per agreed terms with cedants.

The primary focus of these assessments revolves around financial performance, strategic positioning, and the long-term capability to cover liabilities. A good rating for a global reinsurance company will also allow it to operate in jurisdictions that have more stringent requirements. In today’s international reinsurance market landscape, attaining a top-tier rating is more vital than ever to establish oneself as a significant player.

In part 2 of the article, we shall delve into the intricate factors used by rating agencies to assess an insurance company’s financial strength, creditworthiness and overall risk profile.

Authored by: Kunda Katumbo

Asst. Treaty Underwriter, Klapton Re