How Are Life Insurance Companies Rated in California?
Insurance is something we purchase to protect us against loss. This may be loss of property as with home and auto insurance. This may be to protect us from income lost when a loved one dies or to give us the ability to seek medical attention when we get sick. There are ratings companies that help Californians feel better about the money and the trust they are placing into insurance companies.
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California Insurance
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Insurance companies are regulated at a state level by the Insurance Commissioner. The Insurance Commissioner with the Department of Insurance works with state legislators in the regulation of all insurance-related laws. While the Department of Insurance is a consumer protection agency, it is not a rating agency. There are independent national organizations that rate insurance companies.
What Ratings Do
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In order to be confident that your claims will be paid according to your policy when accidents and losses happen, you need to know that the company you are working with has the money to pay it. This is where ratings come into play. A rating company is looking at the insurance company history and the corporate financial numbers to determine the solvency of the company. Solvency refers to how well the company would deal with a catastrophic series of claims. A highly solvent company can deal with these claims without falling into financial catastrophe itself.
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Catastrophic Series of Claims
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Most insurance companies are not paying out a majority of claims on a regular basis. Think about how often you may ask your auto insurance to pay a claim from an accident. Most people are not in frequent accidents. And if you are, you are a high risk insurer with a higher premium to offset the risk. But what happens when something like the Northridge Earthquake happens? This is a catastrophic event that requires a company to pay a high percentage of claims at the same time.
Independent Rating Companies
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The most common rating companies are AM Best, Standard and Poor's, and Fitch Ratings. You see these ratings on marketing material and in newspaper columns talking about the grades that insurance companies have. The grades are determined not just by the assets the company possesses, but by the percentage of liquid assets the company holds. Of course, the ratings companies and the public at large want insurance companies to make money on the premiums sitting, but this needs to be done prudently. This means that the investments are not high risk with ample cash. Lower rated companies take more risk with investments or don't keep as much money liquid.
What Is Safe?
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Safe is a relative term and it is not a guarantee in the financial industry. That being said, if your California insurance company has a rating of BB+ or better, you can consider the company that you are working with to be a solid insurer with a good history of financial prudence. The top-rated companies will have a AAA. If you are looking at anything with a B, B- or below in the CCC through D ranges, you should take a second look at what your rate is and whether you are willing to take the risk of the insurance company filing bankruptcy or not paying a claim. Some people do take this risk for deeply discounted premiums. Each person is comfortable with different levels of risk.
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