When the news hit that State Farm General (which provides homeowner’s insurance in California) had been downgraded by A.M. Best, it triggered a flurry of questions about how this move would impact policyholders. Even for consumers and businesses that don’t work with State Farm General, there was uncertainty and anxiety about the impact of an insurance company’s ratings.
That’s understandable. You purchase insurance with the assumption that the carrier has the financial resources to pay a covered claim, and you need confidence that you’ve made a prudent choice. By understanding how insurance company ratings work and how an independent insurance advisor monitors and responds to changes in carrier ratings, you can rest a little easier.
What Do Insurance Company Ratings Mean?
A.M. Best is one of several agencies that assess and rate insurance companies on a variety of criteria, including their financial stability and their ability to pay covered claims. S&P and Moody’s are two other well-known agencies that rate insurance carriers.
Each agency applies slightly different criteria (which might include financial factors like cash reserves, debt levels, and profitability), and each uses different algorithms and measurement scales when rating insurance companies and predicting their ability to meet future financial obligations. It all results in a real alphabet soup of ratings: single letters vs double letters, uppercase letters vs lowercase letters, and some (but not all) agencies using plus and minus signs.
In the case of State Farm General, A.M. Best downgraded the company’s financial strength rating from “A” (excellent) to “B” (fair) and downgraded its long-term issuer credit rating from “a” (excellent) to “bb+” (fair). Ordinarily, you might think a “B” rating is solid. After all, a “C” grade in the classroom is considered average, so a “B” is usually perceived as above-average. But when it comes to insurers, in reality there are only two categories: carriers with ratings that begin with the letter “A,” and everyone else.
Independent insurance advisors like B. F. Saul only work with A-rated insurance companies, to provide our personal insurance and business insurance clients with assurance that they’re working with financially stable carriers. Our team constantly monitors insurance company ratings though news outlets specific to our industry and other information sources.
If we see that a carrier has been downgraded to below an A rating, we do further research to determine the reason. Then we contact any client that’s currently covered by the affected insurance company and develop a response strategy. Often, that involves remarketing the client to a better-fit insurance company. As a mid-sized independent broker, we have the resources to provide this level of personalized, proactive service.
Is the State Farm Downgrade Indicative of a Broader Trend?
State Farm General’s downgrade was related to a specific set of conditions in California that are making it difficult for homeowner’s insurers to operate profitably in the state, such as the increased incidence of wildfires. In fact, the downgrade came shortly after the carrier announced it would not renew tens of thousands of homeowner’s and commercial apartment property policies in California. It’s also important to note that the A.M. Best downgrade only applies to State Farm General, not the entire State Farm business.
These facts should give consumers and business leaders a degree of comfort and confidence in the insurance marketplace. At the same time, insurance industry challenges aren’t restricted to the state of California or the homeowner’s insurance market.
Climate change is fueling more severe storms that cause more serious damage to homes and businesses. Reinsurance companies are charging insurers higher rates to compensate for the catastrophic losses of 2023, which is driving up premiums. Even the legislative environment can impact insurance costs, as Florida property owners can attest. Before the state passed major tort reform legislation last year, Florida laid claim to a disproportionate percentage of insurance lawsuits; in turn, insurers kept increasing their rates to compensate for the associated losses.
As factors like these fuel volatility and place more financial pressure on insurers, it’s possible more insurance companies could be downgraded. However, that doesn’t mean the impact will be widespread. For context, an A.M. Best report noted 55 US property/casualty companies received credit rating downgrades in 2023, while there were 35 insurance rating upgrades during the same period.
What Should You Do?
If you work with an independent insurance advisor to obtain personal or business insurance, you’ve already taken one of the most effective steps to avoid the repercussions of an insurance rating downgrade.
An independent broker works objectively on your behalf to vet insurance companies based on their financial stability and other important factors. When shopping the market for the best-fit company and developing a customized insurance proposal, your broker will consider the carrier’s ratings and future outlook. And unlike an agent that represents only one insurance company, an independent broker has multiple options available and can quickly pivot if a historically stable carrier is downgraded. These are just a few of the many advantages of working with an independent insurance advisor like B. F. Saul Insurance to secure the best coverage for your needs.
If you have questions about your current personal or business policies and would like insights from an objective insurance advisor, contact the experienced specialists at B. F. Saul Insurance.
Lanie Raphael is a seasoned insurance professional with over 30 years of experience in the industry, with experience in both commercial and high-net-worth insurance. Throughout her career, Lanie has held executive-level roles at prominent insurance companies such as Fireman's Fund, AIG, and ACE Private Risk Service in a variety of disciplines including risk management, product development, operations, and marketing. In the past decade, she transitioned to the independent agency side, assuming leadership roles that involved direct client interaction and working closely with referral sources. As president, she is responsible for leading all aspects of financial reporting and budgeting, business development, and executive recruiting at B. F. Saul Insurance.