S&P Insurer Financial Strength Rating

What Is the S&P Insurer Financial Strength Rating?

The term S&P Insurer Financial Strength Rating alludes to a system a service offered by Standard and Poor's that rates an insurance company's fiscal sufficiency and, in this way, its ability to pay claims made by its policyholders. This rating can be utilized as an aide by a number of various substances, including risk managers and employers before they make key choices. Along with insurance companies, S&P also rates health maintenance organizations (HMOs) and other health insurance plan suppliers.

Understanding S&P Insurer Financial Strength Rating

The S&P Insurer Financial Strength rating system is operated by Standard and Poor's. These ratings have been issued beginning around 1971. They are involved by a variety of professionals in the insurance industry, including insurance brokers who advise clients and government regulators responsible for setting capital requirements for insurers.

These ratings are requested by S&P in the accompanying grades:

• AAA: This is the strongest S&P financial strength rating for insurers. It means that a company has a very strong financial standing with significant liquid assets to fulfill any needs from its policyholders.
• AA: This means an exceptionally strong company with extremely gentle differences between companies with an AAA rating.
• A: This indicates a strong company that may have a few issues in the face of business and financial challenges.
• BBB: Companies with this rating are considered to have a decent financial standing even however they're more inclined to business risks.
• BB: A company with this rating is somewhat more vulnerable than those with a BBB rating in spite of their financial standing.
• B: Although companies with this rating are able to meet their financial obligations, they may have inconvenience doing as such in the face of any problematic conditions.
• CCC: Companies with this rating are highly vulnerable and depend on positive economic, financial, and business conditions.
• CC: Insurers with this rating are at a high risk of default.
• SD (chose default) and D: These ratings infer the insurer is probably going to default on some or all of its policy obligations.

These ratings may be enhanced when the agency utilizes a plus (+) or minus (- ) sign.

S&P weighs many factors when it evaluates financial strength. An insurer's potential exposure to a catastrophic event that may lead to various claims is a critical factor. Others incorporate the company's market position, regulatory challenges, and the impact of interest rates on the insurer's finances. Additional considerations incorporate a company's capital adequacy ratio (CAR), annual earnings, yields on investments, liquidity, and sales growth.

The S&P Global Rating's framework comprises of three components, including a business risk profile of industry and country risk, a financial risk profile comprising of risk position and financial flexibility and modifiers, and a support framework that takes into account external factors like government and geographic conditions.

The S&P Insurer Financial Strength Rating just scores a company's fiscal health and doesn't rate the quality of its insurance products or services.

Special Considerations

Consumers ought to survey their insurers' financial strength ratings annually to guarantee that they remain highly rated. Besides, the agency advises consumers to avoid buying policies from insurers that are rated by S&P with a BB-rating or lower. Other rating services, however, may advise consumers against purchasing a policy from an insurer whose rating is under A-.

S&P Insurer Financial Strength Rating versus Other Rating Services

The S&P is just one of four companies that rate the financial strength of insurance companies. The others are AM Best, Fitch, and Moody's. Each agency has its own rating scale and categories.

Checking how an insurance company is rated by at least two of these rating agencies is really smart. It's best to look into the scores on the rating agency's destinations rather than depending on the insurance company's own report. The ratings advertised on insurance companies' sites may be outdated or feature simply the highest rating from the four companies.

Analysis of S&P Insurer Financial Strength Rating

The S&P and its rating system have faltered in the past. In fact, it has experienced harsh criticism for a portion of its stellar ratings of companies that were in a tough situation. For example, it awarded the insurance behemoth American Insurance Group (AIG) an AA counterparty rating and gave an AA+ rating to the company's core subsidiaries in 2007, just ahead of the financial crisis.

"AIG's extremely strong capital and earnings have profited from the diversity afforded by its property/casualty and life and retirement businesses. Moreover, we don't have concerns regarding AIG's ability to retain at least 'AA' capital adequacy," it stated.

A year later, AIG had to be safeguarded with a bailout package from the Federal Reserve. The company made due and repaid its debt.

Highlights

• The highest S&P rating is AAA.
• The S&P Insurer Financial Strength Rating system indicates whether an insurance company has adequate assets to pay its claims.
• Consumers can compare an insurer's rating from four sources.
• AA, A, or BBB are viewed as acceptable ratings.