Car Insurance Ratings - Guide to Auto Insurance Classifications
It's hard to accurately assess the financial strength of a company by yourself. Even if you can read the public balance sheet you can still miss important details, not to mention that it would be quite an overkill to analyze dozens of insurers on your own. It would be quite silly to run your own in-house audit on the top insurers on the market just to see which one to sign an insurance contract with. The good news is that the information is already out there, properly synthesized for your convenience and, most important, it's free.
Independent evaluators of car insurance companies
There are five companies that run independent financial evaluations on all American (as well as some non-US) insurance companies and publish their findings in all mainstream media channels. These five are Duff & Phelps, A.M Best, Moody's Investors Service, Wiess Research and Standard & Poor's. All five use their own methodology and rating systems, but the results are quite close – sometimes even identical. To illustrate how financial ratings work, we will use AM Best's system in this article just for the sake of the example – it doesn't mean that it's better or more accurate than what the other four companies use.
There are also companies that rate car insurance companies based on the overall customer satisfaction. J.D. Power and ConsumerReports are two of the most well-known and respectable independent surveyors on today's market.
Understanding why ratings are important
Ratings are important on various levels:
- From an insurer's perspective, an evaluator's rating is a tool to promote the business and enhance the trust of investors and customers. An insurance company with an A++ rating is rock solid and everybody should trust it. Such ratings are even used as marketing tools.
- From a customer's point of view, a good financial rating is the sign of a trustworthy company, one that won't run off with your money, go bankrupt or start pulling some weird stunts when you had an accident and need to be reimbursed.
- From a business-to-business perspective, good financial ratings mean the partners are trustworthy. They can pay the bills on time or deliver products and services as advertised.
AM Best's grading system
The system employed by AM Best uses an alphabetical scale to grade companies. The trustworthy and secure ones are graded B+ through A++, while the vulnerable ones are rated from B and B- down to D. Three more descriptors may be seen: E (the company is currently being investigated by regulatory authorities), F (the company is being liquidated) and S (the company is suspended).
It goes without saying that you, as a consumer, should start your search from top to bottom, from the A++ companies down to the B++ and B+ ones. Companies rated B and B- are considered to be moderately vulnerable and, since they are right below the "secure" border, aren't considered that much of a risk. However, treat such deals with utmost diligence and only go with a B- company if you are positively sure you are doing the right thing.
AM Best's financial size classifications
The aforementioned grading system isn't always enough to foresee how a company might act under various scenarios. To enhance the meaning of the A++ to D ratings, AM Best has introduced another indicator – the Financial Size Category (FSC). Based on the capacity to disburse funds from own accounts towards claims, AM Best assigns each insurer a FSC between Class I and Class XV, with I being the weakest (less than $1 million available) and XV representing $2 or more billion available.
J.D. Power's ratings based on customer satisfaction
While AM Best and the other four do an economical analysis of the insurers, there are companies that survey consumers and get their general feeling on how they have been working with certain insurance companies.
J.D. Power and Associates is a long standing company that analyzes customers' opinions and perceptions on various goods, services and vendors and centralizes them in easily accessible reports. Consumers are then given the chance to pick an insurer based on their scoring in various fields – policy offerings, prices and pricing models, billing and payment procedure or customer support – or simply order a list of insurance companies by overall customer satisfaction.
The financial ratings and consumer satisfaction charts won't necessarily match. Just because a company excels in customer support and has knockout prices it doesn't mean it is a solid company with a sustainable business model and vice versa – a top-notch A++ insurer may have a sloppy support department or huge prices.
What you should remember about car insurance ratings
Even though these indicators should be taken into account when deciding which insurer to go with, you shouldn't base your decision solely on them.
The overall customer satisfaction is a tricky indicator. It is usually the mean of the other indicators and should only be used as a rough guideline in your decision making process. Analyze the ratings of each component (price, payment options, customer support, policies available) and decide which is more important to you. If you are on a shoestring budget, for instance, you might live with a not so friendly set of payment options if the price is lower. On the other hand, if you care about your comfort and the value of your time, you should go with the fastest service available and worry less about the total costs.
You should also stay up to date with current car insurance ratings. Don't base your decisions on, let's say, a report you read in the New York Times back in 2001 – a whole lot of things have changed in the mean time. Always get the latest information when you are renewing your policy or contracting a new one. Also, to your best extent possible, try to read the reports every couple of months to stay up to date with the market trends – the company you are with at that moment may take a plunge or a new kid on the block may emerge and take its place. Staying informed will save you money over the long run.