Insurance Rating Company Rating Systems
Each of the five companies has developed a rating system to describe insurers’ financial condition. All of the systems use letters of the alphabet (Moody’s also uses numbers). The ratings generally range from “poor” or “distressed” to “excellent” or “superior.” Rating organizations consider both qualitative and quantitative factors when evaluating an insurer. For example, KBRA uses all the following to calculate an insurer’s financial strength rating:
A quantitative assessment using KBRA’s long-term credit scale and stress testing. KBRA considers factors such as the insurer’s loss reserves, ceded reinsurance leverage, and combined ratio. A quantitative score based on factors like the insurer’s balance sheet, company profile, and risk management strategies An external considerations score that indicates if a parent company may be a potential source of credit. Alternatively, it may suggest that there are outside risks that may negatively impact the firm. A potential rating constraint due to currency transfer risk. An insurer that operates in an emerging market may be unable to raise foreign currency to meet financial obligations due to political or economic constraints.
How Insurance Rating Companies’ Ratings Differ
While the companies use similar data to calculate their ratings, no two systems are alike. For one thing, the companies use different scales:
A.M. Best’s system consists of 13 ratings that range from A++ to D. S&P’s system includes 10 categories from AAA to D. Moody’s system also includes 21 categories but it uses a combination of capital letters, lower-case letters, and numbers (from Aaa to C).Fitch’s scale has 11 ratings ranging from AAA to D.KBRA uses 10 ratings: AAA to D.
The rating companies also differ in the methods they use to calculate insurer ratings. Two companies may consider the same factors, such as the macroeconomic environment, but one firm may attach more weight to it than another.
Comparison of Ratings
The top six ratings used by each of the five companies to evaluate insurers’ financial strength are listed in the table below. The fact that ratings appear in the same row does not mean they are equivalent to each other. That is, S&P’s AA rating may differ somewhat from Fitch’s or KBRA’s AA rating. The classifications used by rating firms are fairly broad, so each classification is likely to include a large number of insurers. For instance, hundreds of insurance companies may qualify for S&P’s AA rating. While these insurers have similarities, they are not identical credit risks. Insurance company ratings reflect insurers’ financial ability to pay claims. They are not a measure of the quality of insurers’ claim handling services. The fact that an insurer can pay claims does not mean it will do so efficiently or effectively.
