Dear JSA,

I’m a little confused – I’m placing a new account, and the insured has asked me to assess the financial strength of the carrier. If the company is approved to do business in my state, why does it even matter?

– Stuck on Financial Strength

Dear Stuck,

What a great question! As insurance agents, we have the duty to place coverage for our insureds that not only meets their needs, but is with a carrier that is financially strong enough to pay a claim should one arise. There are several factors to consider in making coverage placement decisions, including approval by the state in which the coverage is placed, minimum financial ratings standards that may be included in our Errors & Omissions policies, financial strength requirements the insured’s lenders may impose, and finally, the insurance carrier’s financial rating itself.

According to A.M. Best, an insurer rating is “an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contractual obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet, strength, operating performance, and business profile.” In short, an insurance company’s financial rating gives us the ability to compare that company to other carriers objectively.

There are several different rating companies, and while they all apply their own standards and rating techniques, it is a good rule of thumb that if a carrier has a rating lower than “A-“, and/or has a “negative outlook”, it could be cause for concern, and should cause us to examine the situation more closely. The stronger the financial strength of the carrier, the more likely it will be it can honor the insurance contract and pay claims as promised.

Our insureds trust us to place their coverage with good, solid carriers, and we in turn owe them due diligence in searching the marketplace to assure them we are comfortable with the chosen carrier. As agents, we need to make sure we are using our best efforts in choosing carriers and brokers that understand the importance of financial strength, and in turn take a part in assessing the carriers they represent by monitoring and reviewing their financial strength regularly to assure carriers are solvent, have good reputations, and most of all, have the ability to meet their commitments at claim time. Remember, your assessment of a carrier’s financial strength is often the only assurance an insured has that a potential claim will be honored.

Hope this helps! If you want more information about the different rating agencies and their rating methods, there are a lot of articles on the internet that can answer your questions and point you in the right direction!