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What are Insurer Financial Strength Ratings?
Insurance companies are rated by independent rating agencies to show how financially stable they are. Before buying an insurance policy you should check a company's insurance financial strength (IFS) rating, as it indicates the company's ability to pay claims, particularly in situations such as natural disaster when an insurance company might struggle financially due to an onslaught of claims. Here's what you need to know about insurance financial strength ratings.
- What are insurance financial strength (IFS) ratings?
- Ratings companies that provide IFS ratings
- Which UK insurers have 'A' ratings?
- Other types of ratings and reviews
What are insurance financial strength (IFS) ratings?
Insurance ratings are scores created by independent ratings companies that aim to measure the financial strength of an insurance company—in other words, the ability of an insurer stay solvent and pay future claims.
Ratings companies consider a wide range of factors to determine how well an insurer is doing financially, how well it is managed and how vulnerable it is to circumstances like natural disasters or economic downturns.
Understanding the financial strength of an insurance company before buying cover is important because insurance is a financial contract, and an insurer has a financial obligation to their policyholders. Policyholders pay their premiums and in return the insurer pays for valid claims made by policyholders—assuming they have the funds to do so. An insurer in a good financial position should be able to pay these claims; an insurer in a weak financial position might be vulnerable, say, to natural disasters or broad economic hardship, and be unable to meet widespread claims.
What are IFS ratings based on?
IFS ratings indicate how able an insurance company will be to cope with and pay future claims in a timely manner, even if faced with difficult economic conditions, higher claims resulting from natural disasters or other financial difficulties. As a result, the ratings are based on a broad selection of indicators related to financial risks, business risks, risk management, liquidity and more. For example, an IFS rating can reflect an insurer's cash on hand, profitability in recent years or position in the market. The information used by a ratings agency can be a mix of publicly available and/or non-public documents and information.
Examples of IFS rating criteria
- Age of company
- Position in the marketplace
- Cash on hand
- Capital ratio (ratio of capital to risk)
- Debt ratio (ratio of debt to assets)
- Profile of investment portfolio (e.g., high-risk vs. low-risk investments)
- Profile of insurance policies written (e.g., high-risk vs. low-risk policyholders)
- Diversification of products and markets
- Risk management systems
- History of missed claim or benefit payments
- Sector and wider economic trends
- Management projections
- Competitive pressures
Shortcomings of IFS ratings
IFS ratings are opinions, they are not guarantees. Each ratings agency follows a methodology that incorporates factual information to create a forward looking view of future performance. While the resulting ratings are meant to give you an idea of the financial strength of an insurer, they are not perfect. Not only that, but ratings can change and companies once in a strong position can be put on a watch list or even downgraded if their situation has deteriorated.
Ratings companies that provide IFS ratings
There are a number of ratings companies that track the financial strength of insurance companies. The ratings companies that are most common in the UK are Standard & Poors, Moody's and Fitch. (A.M. Best specialises in rating insurance companies only, but they are a US company and their coverage in the UK is sparse.) They each have their own methodology and ratings scales, as you can see below.
| Credit Rating Agency | Insurer Financial Strength (IFS) Rating Scale |
|---|---|
| Fitch | AAA, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–,BB+, BB, BB–, B+, B, B–, CCC, CC, C |
| S&P | AAA, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–, BB+, BB, BB–, B+, B, B–, CCC+, CCC, CCC–, CC, C |
| Moody’s | Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C |
It's important to note the the scales are not directly comparable to each other. For example, a AA+ from Fitch may not be equivalent to a AA+ from S&P.
Which UK Insurers have 'A' Ratings?
Most big insurance companies in the UK have very strong financial ratings and stable outlooks. We've compared ratings for some of the biggest UK insurers to see how they rank. Note, rating agencies have different levels of coverage and there is no rating company that rates all insurance companies in the UK. If you're looking for the rating for a specific company you might have to check all three providers to find a rating.
| Insurance Company | Moody's Rating | S&P Rating | Fitch Rating |
|---|---|---|---|
| Admiral Group | A+ | ||
| Ageas | A1 | A | AA- |
| Allianz | Aa3 | AA | AA- |
| Arch Insurance | A2 | A+ | |
| Aviva | A2 | A+ | A+ |
| AXA | A2 | A+ | A+ |
| Covea | Aa3 | AA- | |
| Direct Line Group | Baa1 | ||
| esure | |||
| Hastings | A- | ||
| Liverpool | (see Allianz) | ||
| NFU Mutual | |||
| RSA | A2 | A | A+ |
| U K Insurance Limited | A1 | A | |
| Zenith Insurance plc | Baa1 | A- | |
To get an idea of a typical IFS rating analysis, click here to see S&P Global's write up of U K Insurance Ltd. (the underwriter for Direct Line and Churchill, among others).
Other Types of Ratings and Reviews
An insurance company's IFS rating is merely one metric to consider when choosing an insurance company. While the IFS rating can give a decent indication of a company's financial stability (and their ability to pay claims in the future), it doesn't paint a picture of the customer experience or of the relative attractiveness of its products compared to competitors.
Customer Reviews. To get a handle on the customer experience your best bet is usually to seek out real customer reviews on sites like TrustPilot and Reviews.io. Google and Yelp can also be useful in this regard. Keep in mind when reading reviews on these sites that a high proportion might relate to the buying experience only (that is, how quick and easy the sign-up process was and value for money), without giving an informative picture of the claims experience, admin fees or ease in reaching customer service for problems later down the line. Independent professional reviews (see below) can be useful for consolidating and commenting on the results of these customer reviews.
Complaints. The Financial Ombudsman Service tracks complaints made by customers about financial businesses, which are then used by the FCA to calculate a 'complaint ratio'. This is one of the metrics we used when comparing the top UK car insurance companies.
Professional Reviews. Independent professional reviews can give a unique, holistic perspective on how well an insurance company compares to its peers—where it shines and what they could do better. Companies like NimbleFins, Which and Defaqto all produce independent content analyzing insurance products and companies in the UK market. Defaqto focuses solely on a comparison of features while Which (a paid service) and NimbleFins (free to read) gather data on features, customer experiences, value for money and more.