3 Types of Insurance Carrier Rating Systems

You’re ready to purchase life insurance, but you just realized that you know next to nothing about the financial strength of the companies you’re about to buy from. That’s a problem. Sure, there are state guaranty associations, but these state-run insurance funds only cover a fraction of your policy, up to $100,000, or in some cases up to $300,000. You want to be certain you’re making the right decision. Here’s how to do that.

The Rating Agencies

Typical rating agencies include A.M. Best, Moody’s, Fitch, and Standard and Poor’s. While these rating agencies do provide ratings for pretty much every financial institution, there’s a problem with the way the ratings are done. First of all, the rating agencies can be influenced by insurers. That’s right, insurance companies can pay rating agencies to rate them.

When you’re looking for a life insurance company to provide you and your family with a lifetime of insurance benefits, the last thing you want is the rating to be tainted by paid ratings. Even if you give insurers the benefit of the doubt, there’s little reason, other than manipulation, to pay for a rating. If the company is solid, a rating agency will rate the insurer as such.

Weiss Ratings

Unlike the more traditional rating agencies, Weiss does not accept money from insurance companies for its ratings. Because of this, some investors, and financial planners, view Weiss to be more accurate in their ratings.

It makes sense. If Weiss does not accept payment for ratings, it stands to reason that it doesn’t have a financial incentive to rate a company one way or another. It’s more like the “Consumer Reports” of the insurance industry.

VitalSigns Comdex

Comdex Scoring, which is done by VitalSigns, is less of a rating system than it is a scoring system that uses an average of all of the popular rating systems in existence. Instead of an absolute rating of financial strength, Comdex Scoring attempts to compare financial firms against one another.

It’s sort of like the standardized tests you took in school. You may have been placed in the “95th percentile” for example. That means you did better than 95 percent of the participants taking the test. This is sort of how Comdex Scoring works. Insurers are compared against one another, and assigned a number.

The number is indicative of the company’s standing when compared against other companies – particularly, the company’s ratings from all major rating agencies.

In general, the Comdex Score is one of the most reliable ways to assess the strength and long-term viability of an insurance company. Not only that, you can easily track a company’s Comdex Score over time and, since the scoring is relatively transparent, it’s not difficult to know how the score is derived.

This is a radical departure from how most rating agencies work in that most ratings are done according to a company’s own internal computation and scoring method which isn’t always available to the general public. When you’re buying a 30-year life insurance policy, it pays to have transparency in the rating methodology.