Blog AM Best Rating

AM Best Rating

Written by Joe Weipert—Senior Vice President April Yearby—Vice President, Agency Co-Owner

November 30, 2020 · Commercial Lines

As a policyholder, it is essential to know your insurer will honor their financial obligation when it comes time to settle a claim.

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One way to determine insurer credibility involves examining reviews, the overall market reputation and consumer reports. AM Best's ratings have also become reliable references when assessing the creditworthiness of insurance companies. The rating was established back in 1899 and is recognized by the US SEC (Securities and Exchange Commission) as a national statistical rating organization.

What is AM Best Rating?

AM Best is a credit rating agency established in 1899 by Alfred M. Best. The company focuses on the worldwide insurance industry and rates insurers' creditworthiness to help policyholders make informed decisions. The ranking runs from A++ (the best rating) to S (suspended rating) A++ to B+ are considered the highest ratings and are given to companies that have superior ability to meet ongoing financial obligations, while B through to D represent companies with fair to poor ability.

AM Best started as a privately-owned company in Oldwick, New Jersey. The rating system was introduced in 1906 following the catastrophic San Francisco earthquake. The natural disaster caused large-scale property damages resulting in massive insurance claims that bankrupted 12 companies in the US and more in the UK. Since then, AM Best rating has provided a qualitative and quantitative assessment of policy providers, seeking to determine and rank their creditworthiness and financial health.

Types of AM Best Ratings

AM Best has four independent credit ratings based on a comprehensive analysis of the insurer's balance sheet strength, business profile, operating performance and, in some cases, the specific details of rated debt securities. The four credit ratings include:

  • FSR (Financial Strength Ratings)—This rating provides a qualitative and quantitative evaluation of the insurer's financial strength and ability to contract obligations and ongoing insurance policy.
  • ICR (Insurer Credit Rating)—Refers to an independent opinion of the entity's ability to meet all ongoing obligations and contracts. The ICR can be issued on a short-term or long-term basis.
  • IR (Issue Rating)—This rating is an evaluation of the credit quality the insurer assigns to issues. It gauges their ability to meet all terms and obligations in the contract and can be issued on short-term and long-term bases.
  • NSR (National Scale Rating)—This is a relative evaluation of insurers' creditworthiness in a specific local area (jurisdiction) and issued on a long-term basis.

How it Works

AM Best uses an interactive rating process that features various qualitative and quantitative assessments. This includes comparisons to industry standards and peers and evaluating the insurer's operating plans, philosophy, terms and management, among others. To obtain AM Best rating, the insurer will need to contact the Business Development Manager that handles the company type and location. Insurers must also sign a rating service agreement, complete a sanctions questionnaire and pay the required fees. The process involves a rating management meeting held before AM best's analysis and decision making. It takes 11 to 14 weeks to complete, depending on when the insurer enters the queue.

Summary

The value of AM Best ratings is straightforward for both insurers and policyholders. For insurers, a good rating boosts trust in the brand and worldwide acceptance. On the other hand, policyholders get to determine the creditworthiness of insurers before purchasing insurance products. Nonetheless, the ratings do not offer a warranty of the entity's ability to meet its financial obligations. There are various other aspects to review alongside AM Best ratings.