Thinking about switching car insurance companies?

It's always a good idea to shop your insurance coverage on regular basis but when switching to a new insurer you want to make sure the company you are considering will be there for you when it's time to make a claim.

Car insurance ratings can help you find an insurer that is both financially sound and deals with customer service and claim issues quickly and fairly.

Rating agencies such as A.M. Best or Demotech can help you gauge the financial strength of an insurance company which is important to know, you want to be confident that your insurer has the financial strength to pay out a claim when disaster strikes.

Keep reading to learn everything you need to know about insurance company ratings.

What are insurance company ratings?

Insurance ratings are simply a score that is created by a rating agency to convey the complete financial strength of an insurance company in an easy-to-read format. These agencies look at a wide variety of different factors including a company's financial strength, how the company is run as well as the people in key positions.

Rating agencies will also look at any external factors that could impact its financial strength such as vulnerability by its policyholders to storm claims or other natural disasters. As an example, an insurance company in California will often see a drop in its rating when wildfires hit the state. All factors that can impact their business are considered.

Rating agencies offer ratings for a variety of insurance companies, including auto, home, life and even health insurance

What are financial company ratings based on?

Financial ratings are based on a wide variety of criteria to make sure they encompass all facets of the business. Rating agencies want to be confident an insurance company can handle a weak or struggling economy, a major natural disaster that results in a huge spike in claims, as well as other factors that could impact their ability to pay out claims.

Each rating agency has its own proprietary formula for setting a rating but in general, they are all using the same data so ratings should fall in the same general area. If one rating agency rates an insurer dramatically lower than other agencies you may want to consider taking a closer look to determine why.

Here are some common factors a rating agency will look at when establishing a rating for an insurer:

  • Cash on hand: Does the insurer have enough cash on hand to deal with everyday business expenses as well as the ability to pay out claims.
  • Debt ratio: This is simply the company's debt divided by its financial assets. A high debt ratio can indicate financial trouble.
  • Revenue streams: A company with multiple revenue streams is typically stronger than one that gets most of its revenue from a single source. Large, nationwide insurers also offer additional financial services as well as multiple lines of insurance giving them numerous revenue streams.
  • Risk management: Insurers must decide if a potential client is a good risk, and their risk management protocols determine who they offer a policy to as well as their rate. If their risk management protocols are not well managed, they may end up with a pool of very risky policies in place.
  • Insurance policies: Companies that only write one type of coverage or are mainly in the business of insuring high-risk drivers or homeowners often end up with lower financial ratings. Always look for insurance companies that offer a wide variety of policies and are not only offering high-risk coverage.

Why are insurance company ratings important?

If your insurance company doesn't have the financial strength to pay out claims when a disaster strikes, your insurance is not really protecting you or your home or car.

Being able to depend on your insurance company when a natural disaster or other covered peril hits your home or car is key and that is why it is important to check the financial strength of any insurance company you are considering buying a policy from.

Insurance companies can and do go bankrupt. They may underprice their policies or end up with more claims than they had anticipated. Regardless of the reason, if your insurer declares bankruptcy when you have a claim in process, there is a good chance you will not be paid out.

Always check the financial strength of any insurance company you are considering when shopping for a new policy.

Which companies provide insurance ratings?

Numerous companies provide financial ratings for insurance companies, but the following are the most common and well respected:

A.M. Best: This is probably the best known and is an insurance industry specific agency. AM Best ratings are one of the most commonly used agencies by insurance companies and they only rate the insurance industry. They use the ratings A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F.

Demotech: This is another well-known rating agency that only rates the insurance industry. Their ratings consist of A'', A', A, S, M, L.

Standard and Poor's: This rating agency is well known in the stock market and doesn't limit itself to the insurance industry. They offer the following ratings AAA, AA+, AA, AA-, A, A+, A, BBB, BB, B, CCC, CC, C, R, SD, D.

Moody's: Another rating agency that is often used in the securities industry but also deals with the insurance industry. Its ratings are: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C

Fitch: This rating agency deals with all industries and its ratings are AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D.

It should be noted that ratings from one agency are not comparable with another. They all use their own proprietary systems and ratings. An "A" rating from one agency may be higher or lower than the same rating from another agency.

Rating agencies are not always correct, there have been some major rating mistakes over the years, as example, Enron was given strong ratings from a number of agencies before it collapsed. Always do your own research in addition to checking agency ratings.

Also, research reviews

While checking an insurer's financial stability is a good starting point, you will also want to read other insurance company reviews of any insurer you are considering. A financially strong insurer is always a plus but if their customer service is awful or they drag out the claim process and take months to send payment, their financial strength won't be much of an asset.

Check complaints and read reviews on a variety of different websites. Look for common complaints which may indicate they have an issue. Remember, every company will have a complaint now and again so don't expect any insurer to have a complaint free record.

A good place to start your search is Carinsurance.com Best Auto Insurance Companies list.

Here are a few websites to check for insurance company ratings:

National Association of Insurance Commissioners (NAIC): This site's "complaint index," assigns insurers a score based on how many complaints the insurer received in comparison to the number of policies its sells. This gives you a clear picture of how often they receive a complaint.

J.D. Power: This consumer research company issues auto insurance reviews on a yearly basis on a variety of factors. Unfortunately, J.D. Power sells their ratings so while you will be able to see the rankings and read a press release about specific areas of the results, you will not have access to the information that went into the ratings unless you purchase the report which tends to be pricey. However, you can use their rankings as jumping off point to start your own research.

Read Local Reviews: You may want to check into more local reviews, sites such as the Better Business Bureau, Yelp, or even Google car insurance reviews. While these auto insurance ratings should be taken with a grain of salt, they may point out issues that warrant further investigation.