How Can I Tell If My Auto Insurance Company Is Financially Stable?

Last Updated on October 2, 2021

Financial stability is a very important factor to consider when choosing a car insurance company. You’ll need to be able to rely on your car insurance company in a crisis, so it’s very important that they have the financial means to pay out their claims. Here’s how to tell if your car insurance company is financially stable.

How To Tell If An Insurer Is Financially Stable

It is actually very simple to figure out whether an insurance company is financially stable or not. There are several organizations that rate the financial stability of insurance companies and make their findings available to the public.

A.M Best is one of the best places to check if an insurer is financially stable or not. They are a credit rating agency that specializes in insurance companies. The highest rating a company can receive is an A++, while the lowest rating available is a D. Any rating with a B+ or higher indicates that the company has a good ability to meet its financial obligations.

There are other agencies that provide financial ratings for insurance companies, most notably Standard & Poor’s, Moody’s, and Fitch. These companies use similar scales and criteria to provide financial ratings for insurers. These companies also differ from A.M. Best in that they do not specialize in the insurance industry – they provide financial security ratings for a variety of different companies and even for entire countries.

All four agencies provide plenty of helpful information about a company’s current financial state. These are great resources to look at when choosing a car insurance company. While they aren’t foolproof, these ratings do give you a good indication of where the company is headed and what to expect financially.

Why Is Financial Stability Important For Insurers?

While most car insurance companies in the United States are very stable, they aren’t infallible. The economy can change at any time, and you’ll need to make sure that the company has the means to pay its claims even during an economic downturn. In the past 20 years, we have seen two economic recessions – one in 2008 and one in 2020 as a result of the COVID-19 pandemic.

Because the economy can change very quickly, it is very important for insurers to prepare for the future. No one could have predicted how quickly the stock market would crash after the pandemic took hold in the United States. There are other factors that can put a lot of strain on car insurance companies. For example, widespread natural disasters in the areas they cover can result in a high volume of comprehensive claims at once. If the company isn’t prepared for this, it could cause financial instability and claims could get backed up.

What Factors Affect Financial Stability Ratings?

There are a variety of factors that these agencies use to develop their ratings. Understanding these factors will give you a better idea of what the ratings mean.

One of the biggest factors these rating agencies look at is an insurance company’s cash flow. It’s very important that insurers have a substantial amount of free cash on hand, rather than having everything tied up in investments.

Rating agencies will also take a look at the amount of debt a company has. While it’s normal for insurance companies to have some debt, the ratio of debt to total financial investments should be relatively small. Debt can get out of hand very quickly in an economic crisis, which is why debt ratios are so important.

Additionally, insurers should have multiple streams of revenue. Rating agencies will assess where the insurers’ revenue comes from and if that is a stable source of income. Having multiple streams of revenue can help keep a company afloat in the event of a financial crisis.

Finally, the insurance company will look at the quality and type of policies that the insurer is writing. For example, if the insurer is writing policies entirely for high-risk clients, then they are likely taking on a higher volume of claims as well. Rating agencies will consider this to be an additional financial risk, so this can negatively affect their rating.

Can Insurance Ratings Change?

Financial stability ratings for car insurance companies are not static – they can change over time as the economy changes. Just because a company has a good financial stability rating now doesn’t mean it will stay that way and vice versa.

There are a number of factors that can cause an insurance company’s financial stability rating to drop. We’ve already mentioned general economic changes as well as natural disasters. Changes within a specific industry can also cause financial instability, as can regulatory changes within that industry. Changes in an insurance company’s business model can also affect its financial stability in the short term.

Which Insurance Companies Are the Most Financially Stable?

Most car insurance companies in the United States are financially stable. Both major national insurance companies and smaller regional providers are typically able to pay their claims comfortably. However, there are some insurance companies that have much better financial stability ratings than others.

GEICO, USAA, State Farm, and Travelers insurance companies all have A++ ratings from A.M. Best, which is the highest rating available. Allstate, Progressive, and Amica have A+ ratings. This indicates that these are the most financially stable car insurance companies on the market. However, if your car insurance company isn’t on this list, don’t panic – an A or B+ rating still indicates that your insurer is financially stable.

Final Thoughts

Financial stability is a very important consideration when choosing a car insurance company. You need to be able to trust that your car insurance company will be able to pay their claims, regardless of what is going on in the world or the current economic climate. Luckily, it is very easy for the average consumer to find out