By Bill Broich
An annuity or a life insurance policy is a long-term financial contract, and consumers who wish to make a good decision can help themselves choose well by consulting a third part rating service in order to make an informed buying decision.
Insurance companies use private rating companies to determine their financial strength. The rating agencies evaluate the insurance companies as to financial strength to meet their current and future contractual obligations. These include their ability to pay current and future claims and their ability to maintain solvency during uncertain financial times.
Insurance companies pay the rating agencies to examine their financial situation and assign a financial strength through numerical ratings. The ratings can be different between separate rating companies. It is important to know what these ratings are and what exactly they mean. A history of insurance company’s ratings may also be important information as to the long term credibility of the insurer. If an insurance company has maintained a long term record of financial stability it could be an indication that their future financial strength could be maintained.
Rating companies which evaluate insurance companies are Standard & Poor’s, Fitch Rating, Weiss Ratings and A.M. Best Co and others. The ratings measure the insurance company’s ability to pay claims and other obligations. Ratings can range between AAA+ to F (failure or insolvency) and many insurance companies promote their ratings as a sign of their strength. While ratings can be helpful in the decision process it is very important to know just what the definition of the rating actually can be. This is important because the ratings of one company never compare to the rating system of another rating company. The systems are not uniform and not comparable.
Top ratings and their differences based on the rating company: As an example of ratings and their interpretation of financial strength consider comparing A.M. Best’s top rating is “A++ Superior.” It is assigned to companies that have, in A.M. Best’s opinion, “a superior ability to meet their ongoing insurance obligations.” Fitch’s top rating is “AAA Extremely Strong”, and denotes that Fitch believes the company “very unlikely to be affected by adverse market conditions”.
Moody’s Investor Service’s top rating is also “AAA Extremely Strong” but Moody’s rating signifies that “market conditions are unlikely to affect a fundamentally strong position”. While Standard and Poor’s uses “AAA Extremely Strong” as their top rating. They use it to mean just what Fitch does, that a company is “very unlikely to be affected by adverse market conditions.”
An annuity or life insurance contract actually represents a liability (or debt) to an insurance company that must be met at some point in the future. Debt management is one of the most important keys to getting and maintaining a high credit rating. Combining long term assets with long term liability obligations can be tricky especially when you consider any volatility of the world’s financial markets.
Many variables are part of an third party rating agency’s decision of determination regarding credit ratings, but the ratings agency bases its rating, in most basic terms, can the company meet its financial obligations. Balance sheet categories including cash accounts, equities and bonds are all compared against long-term obligations. The ratings agency reviews the company’s history and track record including the past history of claim payments.
Each State Department of Insurance (DOI) requires a certain level of financial stability. Each DOI maintains the financial responsibility of any company domiciled within their state. Each DOI depends on each other state DOI to provide some level of oversight into the operations of insurance companies domiciled in their specific state. While each state maintains a level of guarantees for the solvency of an annuity or a life insurance policy, their underlying guarantee should not be the only factor in making a choice of an insurance company. Ratings are important and should be a major part of the decision process.
Before selecting an insurance company as your annuity provider, make certain you fully understand their financial strength and what the ratings really mean.