Agents put the majority of their effort into obtaining the best possible coverage for their clients in the most affordable manner. Being sure the policy will respond to the specific exposures their clients face is the foundation of the agent/insured relationship. Coverage complexity is cited as one of the principal reasons insureds partner with agents to purchase coverage.
Occasionally, however, agents will overlook an important facet of the risk transfer process in their search for the best coverage and value. The quality of the insurance company offering coverage is as important as the coverage being offered. As insurance is basically a promise to perform under certain circumstances, the value of the promise is only as good as the party making it.
There are many considerations when choosing the right carrier partners. They include underwriting expertise, breadth of coverage offered, service, claims payment track record, and financial stability. We are focusing here on assessing financial stability.
Agents typically judge carriers’ stability by looking at their AM Best ratings. While this is an important guide, it is crucial for the agent to use it properly. There are several parts to an AM Best Rating:
- The letter grade, which indicates Best’s determination of their financial strength.
- The financial size category, which addresses their policyholders’ surplus.
- Modifiers, including “U” for “under review,” among others. “Under review” indicates there is an impending change possible, usually within the next six months.
- Outlook designation. This will be either “Positive”, “Negative” or “Stable”.
AM Best ratings are somewhat fluid. As the above codes indicate, there are many different trends in a rating. A rating can be stable, it can be positive, and it can be negative. Two of those imply potential change down the road, trending either up or down. While the Best rating at the time coverage is written is important, it is equally important to monitor it throughout the policy term as it can easily change.
Understanding the implications of placing coverage with a carrier that may have an excellent rating, but that is under review with negative implications is important for an agent. The vast majority of contracts signed that require insurance, require it from an “A-” rated or better company. If the insurance carrier’s rating drops out of the contractually required range during the term of the policy, the insured will no longer be compliant with their existing contracts, or able to enter into new ones. At best, this will lead to difficult and expensive midterm moves for the insured; at worst, a situation where the insured enters a contract without knowing they don’t have acceptable coverage. This type of situation can quickly escalate into a problem for the agency, beyond losing a client.
So while it is very important that agents select quality carriers to work with to stand behind the products they sell, it is equally important that they make that judgment using all of the available information. Visiting AM Best’s website for the complete rating of a carrier (and not just what the carrier tells you), and then making decisions based on that will help prevent avoidable problems during the policy term. And once coverage is placed, agents should have a strategy for continuing to monitor their carriers’ ratings throughout the policy term.