Financial Ratings of an Insurance Company
A Insurance Article Contributed by Shobha Cutting
Financial Ratings of an Insurance Company
Any insurance policy is a contract between the policyholder and the insurance company where the latter promises to monetarily compensate the former in respect of the ill effects of an event, should that event occur. This contract places a financial liability on the insurance company if certain events occur in the future.
There is a possibility that the insurance company is unable to meet its commitments under the insurance policy on account of lack of resources, should the event that was covered by the insurance policy actually materializes. To be certain that the insurance company will be able to perform as required, it is necessary that the potential customer of the insurance policy checks the financial ratings of the insurer at the time of entering into the insurance contract.
Assessment of Financial Strength of an Insurance Company
Examining the performance of an insurance company and evaluating its financial strength is a task that requires a complete understanding of all aspects of insurance operations. There are many organizations that offer assessments of the financial ratings of insurance companies and over the years have evolved various evaluation methods which aid in the financial ratings.
Such accurate assessments require the most sophisticated analysis and are essential for evaluation of the financial health of an insurance company. To begin with, A.M. Best was the exclusive provider of such type of analysis. In early 1980s, a handful of other firms also joined the insurance company ratings and the financial analysis industry.
Insurance and risk managements professionals must analyze such agencies as a corresponding source of information that aids in the functions performed by these professionals.
Tools to Measure Financial Health of an Insurance Company
The rating agencies use both qualitative and quantitative analysis of the information available in respect of the insurance company being assessed, to determine the capability of that company to discharge its obligations. The actual process and criteria used for evaluation are complex and will not be discussed here.
Some of the quantitative factors generally used in providing a financial rating to an insurance company are:
. Liquidity, Leverage, Investments, Risk-Based capitalization, Profitability, Loss Ratio, combined Ratio and return on assets.
. Some of the qualitative factors generally considered in providing insurer ratings are:
. Market Conditions, Competitive Position in Market, Product/Geographic Diversification, Parent Affiliation, Management Philosophy and Experience, Exposure to Volatile Lines, Adequacy of Reserves and Trend/Stability of Performance.
. Specific comparisons between assessments given to an insurance company by various rating agencies are difficult to assess because rating scales and descriptions by the rating agency may vary. A variety of reliable external resources are available to assist intending insurance purchaser, their agents and brokers in making quality selections of a suitable insurance company.
Monitoring changes in financial ratings should be a part of the job description of someone within the risk management department of the intending insurance buyer's organization, especially when a single insurance company provides a large percentage of the policyholder's total insurance needs.
