Insurance

Ask Jean Thursday

Posted by Jean

This week’s question comes from Fran Merwitz in Boca Raton Florida:

Question: “My life insurance company just had its rating taken down a notch. What does this mean? Should I be worried?”

Answer: Like the rest of the financial world, life insurance ratings aren’t immune to the effects of the recession. According to the American Council of Life Insurers, these ratings are used to help potential and current policyholders see the insurer’s present-day ability to pay claims. Ratings also provide an assessment of the insurer’s vulnerability to possible economic downturns. If your insurance company’s rating has gone down a notch, it means that the financial circumstances of your provider have changed in such a way that increases the odds that your insurer may not be able to pay all it’s expected claims. However, a rating downgrade doesn’t necessarily mean that your life insurer will have this problem. “A one notch downgrade is not serious…there are a lot of companies who are in good shape that have faced minor downgrades,” says David Wentworth of the American Council of Life Insurers. In short-if your insurance company’s rating has gone down slightly, I wouldn’t worry, as long as they had at least a fairly secure rating before the downgrade.

But how do you know if your insurer’s rating is good, or in this case, at least fairly secure? There are four separate organizations that rate life insurance companies: A.M. Best, Fitch Ratings, Standard & Poor’s and Moody’s. According to the ACLI, the way that they rate insurers varies by organization:

A.M. Best: A.M. Best assigns ratings ranging from A++ to F. Ratings from A++ through B+ are thought of as being “secure.” Ratings from B through F are thought to be “vulnerable.” Categories under the “vulnerable” heading range from “fair” to “in liquidation.”

Fitch Ratings: Fitch Ratings assigns life insurance ratings ranging from AAA to C. An AAA rating means that the financial circumstances of your insurer are “exceptionally strong.” A C rating means that the insurer is “distressed.” Ratings from AAA through A are thought to be “strong.” BBB ratings are thought to be “good.” A BB through CC grade denotes a “weak” rating.

Standard & Poor’s: Standard & Poor’s ratings range from AAA to R. AAA, AA and A suggest that the insurer is in a financial standing that is “extremely strong,” “very strong,” and “strong,” respectively. A BBB rating means your insurer is in “good” standing. BB denotes a “marginal” rating. B, CCC and CC ratings mean that your insurer is in “weak,” “very weak,” and “extremely weak,” financial standings respectively. R stands for “regulatory action taken.”

Moody’s: Moody’s ratings range from Aaa to C. Aaa means that your provider has “exceptional financial security.” A C rating suggests that your provider has “extremely poor prospects of ever offering financial security.” A Baa rating means that your insurer has “adequate financial security.”

You’ll be able to access ratings through each of the above company’s websites or at insure.com. For a more in-depth guide to life insurance-what the ratings mean, where they fit, where the division is between secure and vulnerable-check out the September issue of The Insurance Forum available here.