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.)

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

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

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

After all, those ratings are an important factor to consider when you’ve made the critical decision to buy life insurance. When you’ve made a decision to provide financial protection for your loved ones in case the worst should happen to you, you want to make sure that protection is, well, protected.

Here’s what you need to know.

What is the insurance rating system?

It’s probably not quite accurate to call it a system. That implies there is one overarching way of evaluating insurers, and that’s just not the case.

There are, in fact, four key third-party ratings providers, and each one has its own unique system. Much the same way outside analysts examine a publicly traded company’s fiscal data to forecast its future, these ratings agencies investigate an insurer’s financial strength and claims-paying ability.

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 case they make a claim on your policy. Important stuff, right?

Especially when you consider an insurance policy can last up to 30 years, or even for the rest of your life. That’s a big commitment, so you want to make sure you can trust the other party over the long haul.

What are the major rating agencies?

Here are the four key third-party rating agencies:

• A.M. Best
• Fitch
• Moody’s
• Standard & Poor’s (S&P)

What are their criteria?

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

Some of the factors A.M. Best considers when rating a company are:

• Evaluating its equity in action
• Balance sheet strength
• Strong historical cash flow
• Financial performance consistency
• Country risk
• Operating performance
• Market position
• How competitive the market is
• How it manages risk

Here are the factors that Fitch considers:

• Financial strength
• Capitalization and leverage
• Debt service capabilities and financial flexibility
• Financial performance and earnings
• Investment and asset risk
• Reserve adequacy
• Asset/liability and liquidity management

Here are the factors that Moody’s considers:

• Credit risk
• Fixed-income obligations

Here are the factors considered by S&P:

• Competitive position
• Industry and country risk
• Financial risk
• Capital and earnings
• Financial structure
• Governance
• Liquidity

No matter the agency, the goal is to evaluate the financial stability of an insurance company, and its ability to meet its financial obligations. And just like it’s helpful to read a couple movie reviews before deciding what to see, it can be useful to consult the ratings for some or all of these agencies as you look for an insurer.

What are their rating scales?

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

Here are the top ratings available from each agency:

A.M. Best

Fitch

Moody’s

S&P

Why do insurance ratings matter?

Again, these are assessments of an insurance company’s financial standing. Life insurance is a unique business — many American life insurers have their roots in the 19th Century or earlier, and the idea of life insurance in general dates 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, C.M. Life.

That means you get the best of both worlds: An easy, online-first application process, which leads to a policy you can then manage online. But you get the backing of a policy issued by MassMutual or its subsidiary C.M. Life. MassMutual has more than 170 years of history behind it.

On that note, you might be wondering about MassMutual’s and C.M. Life’s financial  ratings. Here you go:

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

What about Haven Life?

Because Haven Life is a life insurance agency, it does not receive a rating from the leading rating agencies. You can instead refer to the ratings for MassMutual and C.M. Life, listed above.

So why choose Haven Life? Haven Life offers term life insurance coverage backed by a top-rated insurance company, from an online-first agency devoted to making life (and life insurance) less hard. That includes offering highly competitive rates using an innovative approach to actuarial science.

Start by getting a free online life insurance quote today.