June 8, 2018

Insurer rating agencies can be an invaluable tool for insurance agents, brokers and risk managers wanting to know the financial strength and credit worthiness of an insurance company. Such agencies, however, are not infallible, as has been evident in case of Transit Casualty Company when it went insolvent in the mid-1990s and AIG in the mid-2000s. A.M. Best Company, Standard & Poor's, Moody's and other insurance-rating organizations (such as Fitch, Duff & Phelps and Weiss Research) analyze and issue their reports based financial and other information provided by the insurer. In the case of Transit Casualty, A.M. Best was still giving the insurer high marks, but the insurer was falsely reporting a $40 million surplus on its annual statement when it was in fact insolvent.

 When reviewing insurer financial ratings, it is important not only to consider the specific rate assigned by a rating company, but also to how the ratings are arrived at and what they actually mean. To illustrate the differences between rating companies, three of the most prominent are discussed below.