It can be overly confusing choosing the right life insurance company to apply to, especially when they all claim the best at what they do. Fortunately, third parties like Standard & Poor’s make it much simpler by investigating the inner workings of an insurer to make certain they are likely to hold up to their reputation and make good on their promises.
ABOUT STANDARD & POOR’S COMPANY
S&P is an independent credit rating agency who monitors financial institutions, banks, insurance companies and more to research how well a company is operating under the hood, and they report back with a simplified rating, based on a propriety table, to make it easy for advisors and consumers to better understand their financial strength. S&P is one of the four main rating agencies, which also include:
• A.M. Best
Standard & Poor’s has been around in excess of one and a half centuries, making them the longest standing credit analyst of the major four. They determine the ratings they award by sifting through trillions of dollars in new debt instruments, researching and evaluating thousands of companies’ financial plans, business models, corporate responsibilities, and performances. What this all translates to from a consumer side of comparing companies for their own personal and business needs, is a simple, easy to understand the output of scores, or ratings, which align a company into a category which most represents its current and possible future state. Here is an example of what their rating table looks like:
|“AAA” – Extremely strong||“BB+” – Highest Speculative Grade|
|“AA” – Very Strong||“BB” – Less Vulnerable|
|“A” – Strong||“B” – More Vulnerable|
|“BBB” – Adequate||“CCC” – Currently Vulnerable|
|“BBB-” – Lowest Investment Grade||“CC” – Highly Vulnerable|
|“C” – Currently Highly Vulnerable to Default|
|“D” – Default|
*other ratings may see an additional +/-
When compared to the other major independent agencies who rate insurance companies, you can see the consistency of using alphabetical (or in some cases, alphanumeric) characters to differentiate both financial strength and solvency, but what the letters mean vary from one to the next. With S&P, even a “BB+” is considered, to some extent, speculative. Like the other rating companies, Standard & Poor’s recommends you to only use their ratings as an indicator and small portion of your own research. However, it has been noted over time the ratings obtained by S&P tend to have a very high correlation with their awarded rating. Companies who drift down the scale tend to be those who are in some kind of financial circumstance, whereas those who are upgraded or remain at the top have truly earned their marks. Outside of the United States and the U.S. companies it rates, Standard & Poor’s also is in more than 20 other countries monitoring securities, institutions and companies alike. If you research entails companies who are multinational, do note that they may have different ratings depending on what division or department of the company you are viewing. In addition, companies who do more than just life insurance may have separate ratings for each line of insurance they offer. S&P has done a fantastic job over the years in assessing the risks of insurers, as well as the probability they will remain strong and paying on time. This is crucial when concerning a purchase of life insurance because it’s a product with little to no immediate gratification, and an expectation of payout sometimes decades in the future. While it’s not the only indicator, it can definitely aid in manual evaluations of insurance companies and choose who to place your trust and your business within the long run.