Looking At Credit Ratings

By Author: Norris Rios
Total Articles: 572
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You are probably used to seeing articles warning you that insurers check on your credit rating as part of the process of setting the premium rates. Quickly confirming this here, you should all verify the accuracy of the data collected by the credit rating agencies. But the point of this article is the mirror image. The trigger that finally burst the bubble of the property market here in the US was the failure of Wall Street banks. You might think the recession is over, but the Federal Deposit Insurance Corporation (FDIC) has reported 39 banks have failed up to the end of May 2011. The current estimate is the FDIC is on the hook for just over $640 million and it will struggle to break even this year as the failures keep on coming. In this race to closures, Georgia is in the lead with its regulators closing ten banks.

You might think insurance companies would be less at risk but you would be wrong. There's a great deal of uncertainty about the business of insurance. The profitability depends on being able to estimate how many claims will come in. So long as there's enough premium income, they are safe. But if the companies ...
... are caught by an unexpected surge of claims, they can quickly find themselves in trouble. Take the recent changes in the weather as an example. The weather patterns have been changing quite quickly with this year's tornado season being particularly bad. In past years, insurers have been relatively lucky with the worst tornadoes missing the towns. This year we've seen major damage to buildings, their contents and vehicles. The claims on comprehensive policies for damage to cars and trucks have been unusual and this will run down the affected insurers' capital.

So this this year, five insurance companies have gone into liquidation, three in Florida, and one of both Illinois and California. In 2010, twenty insurers failed. This may indicate the rate of failures is slowing. To be sure, you should check the rating of any insurance company quoting you a premium rate. It would be tragic if you paid the premium and then found it had disappeared when it came to make a claim. The most reliable of the credit raters for insurance companies is A M Best. So far this year, it has downgraded a number of insurers, the biggest being the State Auto Group (which is unlikely to fail but worth watching carefully).

As a word of reassurance, if you do buy a policy from a company that goes into insolvency, the companies fall into the hands of the regulators appointed by your state. All states have a guarantee fund designed to protect you. Under normal circumstances, you are transferred to another stable insurer. If that fails, the guarantee fund pays out on valid claims. This is good protection but it can slow down the process. To avoid being left waiting for someone to deal with the claim, it's better to go with an insurer with a good credit rating. So when you get your free auto insurance quotes, check out the credit rating for the companies offering the best terms. If they are sound, buy with confidence. Otherwise, get more auto insurance quotes.