Using Insurer Financial Ratings to Choose Your Insurance Carrier

The right to choose is one of our most closely guarded freedoms. But along with that right comes the responsibility of being accountable for the consequences of your choice. If the choice turns out to be a poor one, the consequences can have devastating effects, especially if the decision-making is in a business context.

When you select an insurance carrier you need to weigh each option against the same set of objective criteria. The goal is to use a set of pre-established conditions that will ensure the selected carrier will have the financial strength to stick with you over the long-term. This concept is the foundation for what insurance evaluation services perform.

Analyzing a carrier’s financial standing is a fairly complex task requiring a lot of intricate calculations. Each of the recognized insurance ratings firms have a somewhat subjective way of arriving at the ratings they give companies. However, there are some common criteria they all use in their evaluations. The first criterion is the company’s liquidity. Going-hand-in-hand with liquidity is leverage. Leverage is the amount of money a company borrows to increase its assets either through purchase or investment. The more leveraged a company is, the more debt and conversely, the less equity they have, which affects their liquidity.

Of course, companies are rated on their investment portfolio because it also affects their liquidity. Their portfolio needs to be diversified with quality securities in order to receive a high mark in this area.  The next evaluation point is risk-based capitalization. This is the theoretical amount of capital needed to cover the risks associated with their operation. If this money is put in reserve, it lessens a company’s available liquid assets. It also affects profitability, which is another area for evaluation.

Other more general aspects that are assessed include the overall conditions of the market, how diversified the carrier’s product line is, how competitive they are when measured against other carriers with a similar product lines, the experience level of their management team, how much of their product line is made up of policies that are extremely risky to underwrite and how large a reserve they have to cover risk. An insurance carrier that receives high marks in all of these areas of assessment is one that you can depend on to be around when you need them.

You have access to this information by reading reports generated by the insurance evaluation services. There are a number of them available, but the three most commonly used are:

  • A.M. Best Company – they are the original insurance raters, established in 1906. They use letter ratings to evaluate not only the company’s current financial condition, but also its future outlook. They also have a NR designation, or “not rated.” The NR designation includes the general reason why a rating was not assigned. Best lists its ratings scale and insurer profiles on its web site
  • Standard & Poor’s – they assign an insurer a financial strength rating based on an assessment of whether or not the carrier has the financial capability to meet its obligations as outlined in the terms of its insurance policies and contracts. A Standard & Poor’s evaluation uses both hard numbers and subjective factors such as general attitudes toward the company. Their ratings categories and reports can be found at
  • Moody’s Investor Services – they also use an evaluative approach that includes both objective and subjective factors to determine if a carrier can meet its obligations to its policyholders. You can find their reports at

Until You Know It’s Protected, Keep Your Boat on Dry Land

Americans love the sense of freedom and adventure that comes from boating. But boating can have a dark side, too. According to the U.S. Coast Guard, there were 4,730 boating accidents that involved 736 deaths in 2009. The price tag of these recreational boating accidents is high: about $36 million dollars per year.  And these figures are probably only the tip of the iceberg since the Coast Guard believes that more than 80 percent of all boating accidents go unreported.

Given this level of risk for accidents, it would make sense that boat owners would look for a way to protect themselves, but that doesn’t seem to be the case. A study conducted by Progressive Insurance revealed that nearly one third of U.S. boat owners don’t own a separate watercraft policy. That’s probably because boat owners assume that their craft is covered by their personal auto policy or their homeowner’s policy. This is a mistake that can cost them big time.

The standard auto policy covers the boat trailer for liability with the option to add coverage for physical damage. The boat itself, however, is not covered for liability or damage.

Some homeowner’s policies offer coverage for physical damage for boats, but only for smaller vessels. The typical homeowner’s policy contains a special property limit of $1,500 on watercraft, which doesn’t begin to equal the dollar value of most boats. In addition, the covered perils specific to the boat are also greatly restricted.

There is also liability coverage available for boats under the majority of homeowner’s policies, but once again, it is only applicable to smaller watercraft. The only exception is a boat with an outboard motor. That means that any type of boat you own that is powered by an inboard or inboard-outboard motor is excluded from liability coverage under the homeowner’s policy.

Because most boat owners are unaware how large a property and liability loss they expose themselves to without proper insurance, the Institutional Risk Management Institute (IRMI) has created a list of loss scenarios that demonstrate the need for specialized boat owners coverage:

·  Your cruiser collides with a speedboat whose operator fails to yield the right of way, causing extensive damage to your boat. The owner of the speedboat does not have any insurance coverage.

·  An expensive fishing boat you just purchased is stolen from your home.

·  Your 27-foot-long sailboat is damaged by a hailstorm and high winds while docked at the marina.

·  Your sport fishing boat is struck by lightning, incapacitating its electrical system.

·  Your daughter’s friend is water skiing behind your boat and  falls into the lake, injuring herself, due to the excessive speed of the boat.

·  You negligently cause another boat to overturn to avoid a collision.

·  Your outboard motor explodes, seriously injuring your next-door neighbor.

These scenarios illustrate the need to factor insurance costs into the equation when buying a boat.  If you fail to insure your boat properly, your boat loan may become the smallest of your financial worries.