How does the ranking of auto insurance companies work?
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UPDATED: Jun 4, 2019
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When you shop for auto insurance coverage, getting coverage for the lowest price might be your primary concern. Although price is important for ensuring that your premium payments fit your budget, it is not the only factor.
A car insurance company’s rating is an indicator of the company’s ability to pay your claim if you have an accident or loss. Buying a cheap car insurance policy will not help you if the company does not pay your claim in a timely manner.
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Understanding how rankings work can help you choose a company that will meet your insurance needs if your car is damaged, or if you are involved in an automobile accident.
Part of an insurance company’s ranking depends on the creditworthiness of the company. Creditworthiness can affect the company’s continued solvency, or its ability to manage policyholder claims while still paying for overhead, marketing, claims adjustment costs, and acquisition expenses.
An auto insurance company’s creditworthiness can also affect the company’s ability to borrow funds for expansion and growth, which helps the company acquire new policyholders for added financial stability.
The rating bureau looks at how an insurance company has handled its past financial obligations when determining a credit rating.
A company that has consistently paid its creditors on time will receive a favorable credit rating. Conversely, a company that has defaulted on one or more of its debts will receive a poor rating.
The amount of debt a company carries is also a critical factor in determining a credit rating. A company with a high amount of debt, compared to the company’s income, can be a warning sign that the insurer might not be able to pay claims.
This is because if the company’s solvency is jeopardized, creditors will look for money reserved for claims to recover the company’s debt.
Auto insurance company rankings also depend on the financial strength of the company. Although insurance departments and rating bureaus each assess a company’s financial strength a little differently, most use several common factors.
The company’s capital reserves play an important part in its financial ranking. Reserves are the amounts of liquid assets, usually cash or a cash equivalent, set aside for claims payments.
These funds can help an insurance company pay its claim expenses if a catastrophic event occurs.
Examples of catastrophic events that affect auto insurance companies include natural disasters such as hail, hurricanes, and tornadoes.
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The value of investments, as well as the performance of those investments, factor into an insurance company’s financial strength rating. Insurance companies typically invest heavily, and derive a portion of their income from these investments.
In the case of auto insurance, a company might fund its operations almost entirely from investment income.
An insurance company’s growth rate can also affect its rankings.
Although insurance companies expect to gain market share over time, rapid growth can actually be detrimental to an auto insurance company’s rankings.
This is because, during rapid periods of grown, the company quickly acquires new policyholders. This represents a greater risk of loss for the company.
If a rapid influx of new policyholders resulted in a high number of claims in a short period of time, the company’s solvency could be in danger.
Complications with Expansion
In some cases, territorial expansion can trigger an increase in policyholder numbers and elevate a company’s risks.
Rapid territorial expansion can affect an insurance company’s ranking, not only because of the heightened claims risk but also because of the cost of geographic expansion.
The company will likely have to use liquid assets to purchase field offices, acquire and train new agents, and market to local consumers.
There are also regulatory costs involved with territorial expansion. Depending on state laws, an insurance company might spend hundreds of thousands of dollars on company, agency, and agent licensing, as well as security deposits, regulatory fees and other expenses.
Although these costs might not significantly affect a large company’s financial strength, they might hurt a smaller company that decides to quickly expand.
Whether a company is under regulatory supervision also affects the company’s ranking. If an insurance company becomes insolvent or is nearly insolvent, it may be placed under regulatory supervision.
This means that the state insurance department takes control of the company’s operations and finances in an effort to return the company to solvency.
Consumer complaints are more commonly tracked by state regulatory agencies than rating agencies; however, they can play an important part in how well one insurance company stacks up against another.
Each state’s auto insurance agency maintains a complaint division that receives forms from consumers who have had disputes with auto insurance companies.
Insurance department staff members typically do not issue a ruling in a dispute, but they do encourage insurance companies to provide policyholders and claimants with fair and equitable treatment.
They also encourage companies to pay claims in a timely manner.
State insurance departments maintain statistical records of complaints for each company. These records contain information about the types of complaints, as well as whether the insurance company responded or attempted to resolve the dispute.
The regulatory agency then compiles a ranking of auto insurance companies according to complaints.
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