What is the insurance rating system and why does it matter?

Movie ratings – you know what they are and what they mean. (Rated G? Expect wholesomeness. Rated R? Leave the kids at home.)

Go out to eat? You know what a Yelp rating means. (Five stars? Expect deliciousness. One star? Something is fishy, ​​and it might not be the fish.)

But what about life insurance? Turns out they have ratings too. And these ratings can be… a little confusing. (Where else could an A+ grade actually be… kind of mediocre?)

Fear not: We’ll help you decode what these ratings are and what they mean.

After all, these ratings are an important factor to consider when you̵

Here’s what you need to know.

What is the Insurance Classification System?

It is probably not entirely correct to call it a system. It implies that there is an overall way to evaluate insurance companies, and that just isn’t the case.

There are actually four major third-party valuation providers, and each has its own unique system. In much the same way that outside analysts examine a publicly traded company’s tax data to predict its future, these credit rating agencies examine an insurer’s financial strength and ability to pay.

To put it another way, the purpose of these ratings is to evaluate how likely an insurer is to pay what it owes your loved ones in the event they make a claim on your policy. Important things, right?

Especially when you consider that an insurance policy can be valid for up to 30 years, or even for the rest of your life. It’s a big commitment, so you want to be sure you can trust the other party for the long term.

What are the major credit rating agencies?

Here are the four important third-party rating agencies:

What are their criteria?

The criteria used to rate an insurance company vary by credit rating agency.

Some of the factors that AM Best considers when rating a company are:

• Evaluate your equity in action
• Balance sheet strength
• Strong historical cash flow
• Consistent financial performance
• Country risk
• Operational performance
• Market position
• How competitive the market is
• How it manages risks

Here are the factors Fitch considers:

• Financial strength
• Capitalization and leverage
• Debt servicing ability and financial flexibility
• Financial performance and results
• Investment and asset risk
• Reserve adequacy
• Asset/liability and liquidity management

Here are the factors Moody’s takes into account:

• Credit risk
• Interest obligations

Here are the factors S&P considers:

• Competitive position
• Industry and country risk
• Financial risk
• Capital and profit
• Financial structure
• Steering
• Liquidity

Regardless of the agency, the goal is to evaluate an insurance company’s financial stability and its ability to meet its financial obligations. And just as it’s good to read a couple of movie reviews before deciding what to watch, it can be useful to consult the ratings of some or all of these agencies when looking for an insurer.

What are their grading scales?

Just to keep you on your toes, each credit rating agency also has a completely different rating scale. For example, an A+ from AM Best means “superior.” An A+ from S&P is at its bottom rating.

Here are the top ratings available from each agency:

AM best

Fitch

Moody’s

S&P

Why do insurance ratings matter?

Again, these are assessments of an insurance company’s financial position. Life insurance is a unique business – many American life insurance companies have their roots in the 19th century or earlier, and the idea of ​​life insurance in general goes back even further.

And yet, as with most business categories, life insurance has been disrupted (or at least changed) by the Internet. That includes startups like Haven Life. But unlike some startups, Haven Life is wholly owned and backed by MassMutual – every Haven Term policy is issued by MassMutual or its subsidiary, CM Life.

This means you get the best of both worlds: A simple, online-first application process, which leads to a policy that you can then manage online. But you are backed by a policy issued by MassMutual or its subsidiary CM Life. MassMutual has more than 170 years of history behind it.

On that note, you may be wondering about MassMutual’s and CM Life’s financial ratings. Here you go:

• AM Best: A++ (superior)
• Fitch: AA+ (very strong)
• Moody’s: Aa3 (high quality)
• S&P: AA+ (very strong)