S&P Insurer Financial Strength Ratings: Meaning, Criticism (2024)

What Is the S&P Insurer Financial Strength Rating?

The term S&P Insurer Financial Strength Ratingrefers to a system a service offered by that rates an insurance company's fiscal soundness and, therefore, its ability to pay claims made by its policyholders. This rating can be used as a guide by a number of different entities, including risk managers and employers before they make key decisions. Along with insurance companies, S&P also rates health maintenance organizations (HMOs) and other health insurance plan providers.

Understanding S&P Insurer Financial Strength Rating

The S&P Insurer Financial Strength rating system is operated by Standard & Poor's. These ratings have been issued since 1971. They are used by a variety of professionals in the insurance industry, including insurance brokers who advise clients and government regulators responsible for setting capital requirements for insurers.

These ratings are ordered by S&P in the following grades:

• AAA: This is the strongest S&P financial strength rating for insurers. It denotes that a company has an extremely strong financial standing with significant liquid assets to meet any demands from its policyholders.
• AA: This denotes a very strong company with very mild differences between companies with a AAA rating.
• A: This indicates a strong company that may have some issues in the face of business and financial challenges.
• BBB: Companies with this rating are considered to have a good financial standing even though they're more prone to business risks.
• BB: A company with this rating is slightly more vulnerable than those with a BBB rating despite their financial standing.
• B: Although companies with this rating are able to meet their financial obligations, they may have trouble doing so in the face of any problematic conditions.
• CCC: Companies with this rating are highly vulnerable and rely on positive economic, financial, and business conditions.
• CC: Insurers with this rating are at a high risk of default.
• SD (selected default) and D: These ratingsimplythe insurer is likely to default on some or all of its policy obligations.

These ratings may be enhanced when the agency uses a plus (+) or minus (-) sign.

S&P weighs many factors when it evaluates financial strength. An insurer's potential exposure to a catastrophic event that may lead to numerous claims is a critical factor. Others include the company's market position, regulatory challenges, and the impact of interest rates on the insurer's finances. Additional considerations include a company’s capital adequacy ratio (CAR), annual earnings, yields on investments, liquidity, and sales growth.

The S&P Global Rating's framework consists of three elements, including a business risk profile of industry and country risk, a financial risk profile consisting of risk position and financial flexibility and modifiers, and a support framework that takes into account external factors such as government and geographic conditions.

Special Considerations

Consumers should review their insurers’ financial strength ratings annually toensure thatthey remain highly rated. Furthermore, the agency advises consumers to avoid buying policies from insurers that are rated by S&P with a BB-rating or lower. Other rating services, though, may advise consumers against purchasinga policy from an insurer whose rating is less than an A-.

S&P Insurer Financial Strength Rating vs. Other Rating Services

TheS&P is just one of four companies that rate the financial strength of insurance companies. The others areAM Best, Fitch, and Moody’s. Each agency has its own rating scale and categories.

Checking how an insurance company is rated by at least two of these rating agencies is a good idea. It's best to look up the scores on the rating agency's sites rather than relying on the insurance company's own report. The ratings advertised on insurance companies’ websites may be outdated or feature only the highest rating from the four companies.

Criticism of S&P Insurer Financial Strength Rating

The S&P and its rating system have faltered in the past. In fact, it has come under fire for some of its stellar ratings of companies that were in trouble. For example, it awarded the insurance behemoth American Insurance Group (AIG) a AA counterparty rating and gave an AA+ rating to the company's core subsidiaries in 2007, just ahead of the financial crisis.

"AIG’s very strong capital and earnings have benefited from the diversity afforded by its property/casualty and life and retirement businesses. Furthermore, we don’t have concerns regarding AIG’s ability to retain at least ‘AA’ capital adequacy," it stated.

A year later, AIG had to be rescued with a bailout package from the Federal Reserve. The company survived and repaid its debt.