Choosing an insurance company is a big decision. Whether you are buying a policy or considering an investment, you need to know if the company is reliable and strong. Understanding how to look past the marketing and analyze key factors like financial health and customer service can protect you from risky choices. This guide breaks down what really matters so you can feel confident in your decision.
Why Financial Strength is the Most Important Factor
The first thing you should always check is an insurance company’s financial strength. A company that isn’t financially healthy might not be able to pay your claim when you need it most, regardless of what its policies promise. This is why financial ratings are so critical.
Independent agencies like A.M. Best, Moody’s, and Standard & Poor’s evaluate an insurer’s ability to meet its obligations. They provide simple ratings that tell you if a company is on solid ground. According to the Insurance Information Institute, more than 90% of all U.S. insurers have a rating of A (excellent) or higher.
When you review an insurer, look for these key indicators of financial health:
- High financial strength ratings from reputable agencies
- A history of consistent growth in its assets and surplus
- A healthy ratio of premiums written to its surplus capital
- Strong liquidity to cover large or unexpected claim payouts
These ratings provide a quick way to gauge a company’s stability. A strong rating is a clear sign that the company is well-managed and can withstand tough economic conditions, giving policyholders peace of mind.
| Rating Agency | Top Rating | What It Means | Lowest Rating | What It Means |
|---|---|---|---|---|
| A.M. Best | A++ | Superior | D | Poor |
| Moody’s | Aaa | Exceptional | C | Extremely Weak |
| Standard & Poor’s | AAA | Extremely Strong | D | Default |
Is the Insurance Company Actually Profitable?
Profitability shows whether an insurer’s business model is sustainable. Insurance companies make money through underwriting, which means they collect more in premiums than they pay in claims, and by investing the premiums they hold.
A key metric to check is the combined ratio. This is calculated by dividing the sum of claim losses and expenses by the premiums collected. A combined ratio under 100% means the company is making a profit from its underwriting activities.
The National Association of Insurance Commissioners (NAIC) reports that the industry average combined ratio often stays between 97% and 100%. If a company consistently has a ratio over 100%, it could be a red flag, suggesting it’s losing money on its core business.
Also, look at the company’s net income over several years. Steady profits are a sign of stability, while big swings between profit and loss could signal underlying problems.
How They Handle Claims and Treat Customers
An insurance policy is a promise to be there for you during a difficult time. How a company handles claims is the ultimate test of that promise. You want an insurer that pays claims fairly and promptly, without unnecessary hassle.
You can investigate a company’s track record by looking at its complaint ratio. Regulators like the NAIC publish a Complaint Index, where a lower number indicates fewer complaints relative to the company’s size.
A 2023 study by J.D. Power revealed a significant link between customer satisfaction and efficiency. Insurers with high satisfaction scores processed claims 30% faster on average than those with lower scores. This speed can make a huge difference when you are trying to recover from an unexpected event.
A Look into Their Investment Strategy
Insurance companies don’t just let your premium payments sit in a bank account. They invest that money in a wide range of assets to generate returns, which helps keep them profitable and able to pay claims.
A well-managed insurance company will have a conservative and diversified investment portfolio. You want to see a strong focus on safe, income-generating assets like bonds, not risky bets that could jeopardize the company’s financial stability. You can usually find information about a company’s investment mix in its annual report.
| Asset Type | Average % of Portfolio (Life Insurers) | Main Goal |
|---|---|---|
| Bonds | 65-75% | Safety, income |
| Stocks | 5-10% | Growth |
| Real Estate | 2-6% | Diversification |
| Cash/Short-term | 5-8% | Liquidity |
(Source: American Council of Life Insurers, 2023 Fact Book)
Reputation and Following the Rules
The insurance industry is heavily regulated to protect consumers. A company’s history with regulators is a powerful indicator of its trustworthiness. Frequent fines, lawsuits, or regulatory actions are serious warning signs.
Always verify that the company is licensed to operate in your state by checking with your state’s insurance department. A good reputation is built on a foundation of ethics, transparency, and a commitment to long-term customer relationships, not just on avoiding trouble.
How to Compare Different Insurance Companies
With so many options available, comparing insurers can feel daunting. To make an informed choice, focus on the factors that truly matter. Use this checklist to make direct, apples-to-apples comparisons.
- Financial Ratings: Look for high ratings from agencies like A.M. Best. Higher is always better.
- Claims History: Check for low complaint ratios and positive customer reviews about fast payouts.
- Product Offerings: Does the company offer the specific type of coverage you need?
- Premiums: Are the prices competitive for the level of coverage you’re getting?
- Customer Service: Is their support team accessible, knowledgeable, and responsive?
Sometimes, the best insights come from personal experience. Don’t hesitate to ask friends, family, or a trusted financial advisor for their recommendations and experiences.
Frequently Asked Questions
What do insurance company ratings mean?
Insurance ratings from agencies like A.M. Best or Moody’s assess a company’s financial health and its ability to pay claims. A higher rating indicates a lower risk that the company will fail to meet its obligations to policyholders.
How do I know if an insurance company is safe?
To determine if an insurer is safe, check its financial strength ratings, read customer reviews, and look up its complaint ratio with the NAIC. Also, confirm it is licensed to do business in your state through your local insurance department.
Why does an insurer’s investment strategy matter?
A conservative investment strategy helps ensure the company has sufficient funds to pay claims, even during a recession or market downturn. It shows the company prioritizes stability over risky, high-growth ventures.
What is a combined ratio and why is it important?
The combined ratio measures an insurer’s underwriting profitability by comparing premiums collected to the claims and expenses it paid out. A ratio below 100% is a good sign that the company’s core business is profitable.
Should I only buy from the biggest insurance companies?
Not necessarily. While large companies often have strong financial backing, many smaller and regional insurers are highly reliable and offer excellent service. Focus on financial strength and reputation rather than just size.
What are the biggest red flags to watch out for?
Major red flags include low financial ratings, a history of regulatory fines or actions, consistently high combined ratios, and a large number of negative customer reviews or official complaints about claims handling.
