Insurers are regulated by state insurance departments. Each state’s regulatory body monitors the financial health of insurers licensed to do business there. Regulators try to ensure that the rates companies are charging are neither excessive nor so low that they trigger insurer insolvencies. When insurers become financially unstable, regulators may attempt to rehabilitate them. Despite regulators best efforts, however, some insurers fail. Thus, insurance buyers need to evaluate a prospective insurer’s financial strength before purchasing a policy.
Assessing an insurer’s financial health is relatively easy since rating agencies have done the number crunching for you. These firms include A.M. Best, Standard and Poor’s, Moody’s, Fitch, and Weiss Ratings. Each company develops insurer ratings using different criteria. Consequently, an insurer may be rated highly by one agency but not so highly by another. For this reason, it’s a good idea to consider ratings from multiple agencies when assessing an insurer.