AM Best: Exploring Definition, History, and How the Rating System Works

With hundreds of insurance providers, Canadian consumers need transparent insights to make informed decisions. AM Best ratings offer an independent assessment of insurers’ financial strength to help guide wise insurance purchases.

This extensive guide will examine what AM Best ratings mean, how Canada’s major insurers score, and why these ratings matter for consumers.

What is AM Best?

Founded in 1899, AM Best Company pioneered insurance company ratings. Headquartered in the United States, AM Best analyzes insurers’ balance sheets, performance metrics, business profiles and risk management capabilities. These independent analyses inform AM Best’s opinions on insurers’ abilities to meet policy and contractual obligations.

AM Best monitors over 3,500 insurance companies globally (source: https://web.ambest.com/docs/default-source/regulatory/transparencyreport_ambers_2017.pdf) . For Canada specifically, they rate the financial strength of more than 500 property/casualty, life and health insurers based in the country. AM Best also provides ratings for reinsurance companies, insurance conglomerates, and hedge funds based in Canada.

Overview of AM Best’s Rating System

AM Best uses an easily understood rating scale ranging from A++ to D. These ratings indicate insurers’ abilities to meet senior financial obligations and pay out policyholder claims. Higher ratings signal stronger financial fortitude.

AM Best Rating Categories

AM Best divides ratings into the following core categories:

• Superior: In AM Best’s opinion, insurers rated A++ and A+ have a superior ability to meet ongoing insurance obligations.
• Excellent: A and A- ratings are assigned to insurers that demonstrate an excellent ability to meet policy and contract obligations.
• Good: Insurers rated B++ and B+ can meet obligations but may be vulnerable to adverse economic or underwriting conditions.
• Fair: Companies rated B and B- have a fair ability to meet obligations but are more vulnerable to adverse conditions.
• Marginal: C++ and C+ ratings indicate insurers with marginal ability to meet obligations and significant financial vulnerability.
• Weak: C and C- ratings reflect insurers demonstrating weak ability to meet obligations, with extreme vulnerability.
• Poor: D ratings are reserved for insurers with poor ability to meet obligations and extreme financial vulnerability.

Within each category from A++ to C, insurers may receive a ‘+’ or ‘-‘ modifier indicating gradation at the upper or lower end of the range.

Notches and Modifiers

Beyond letter grades, AM Best ratings may include notches and modifiers:

• Under Review (u): The rating was placed under review due to positive, negative, or uncertain implications.
• Rating Suspended (s): Rating suspended due to sudden events severely impacting operations.
• NR: Not Rated, for companies not rated by AM Best.

How AM Best Ratings work

AM Best’s standardized rating system is a crucial tool for assessing insurers’ financial strength. With ratings ranging from A++ to D on a 13-point scale, it provides a comprehensive understanding of an insurer’s stability.

AM Best’s evaluation process is comprehensive, considering four core factors when assessing an insurer’s financial strength. This thorough approach instills confidence in the ratings.

• Balance Sheet Strength – Reviewing the quality of the balance sheet’s capital, liquidity, reserves, investments, and overall solidity. Insurers must maintain adequate capital and liquidity.
• Operating Performance—Analyzing underwriting standards, profitability, earnings stability, and ability to withstand adverse conditions like economic downturns. Avoiding underwriting losses is key.
• Business Profile: Assess the insurer’s management, market position, distribution channels, operating scale, and business diversification. Market leadership helps.
• Enterprise Risk Management – Review how effectively companies identify, analyze, and safeguard against risks through corporate governance, controls, and strategic planning.

AM Best monitors insurers’ performance on these factors both quantitatively and qualitatively. Analysts utilize proprietary capital models, stress testing, and sensitivity analysis.

Actual ratings are determined during rating committee meetings. Committees review analysis and vote on proposed ratings, aiming to ensure AM Best ratings reflect current financial strength.

Distribution of Ratings Among Canadian Insurers

As of August 2022, here is the distribution of AM Best ratings among the 500+ insurers rated in Canada:

This breakdown reveals some key facts about Canada’s insurance industry:

• The vast majority (60%) of insurers rate in the Excellent or Superior categories, indicating sound financials.
• 40% rank Good or Fair, with vulnerability to adverse conditions.
• Less than 1% show Marginal financial strength.
• No Canadian insurers have the lowest C, D or E ratings.

Overall, AM Best grades Canadian insurers favourably, with ample Superior/Excellent ratings and few companies near the bottom of the scale. Next, we’ll look at ratings for specific prominent insurers.

AM Best Ratings of Top Canadian Insurance Brands

Most significant, nationally known Canadian insurers hold AM Best ratings of A or A-, signalling Excellent or Superior financial strength. Maintaining solid financial standing is critical for customer confidence and managing growth in Canada’s $60 billion property and casualty insurance sector.

Below are AM Best ratings for ten leading life insurance providers in Canada:

Few Canadian insurers score below B+ or B on the AM Best scale. The most prominent brands are clustered within the “A” rating band, with relatively little differentiation. However, even small rating differences can impact consumer perceptions and demonstrate financial management prowess.

Next, we’ll examine how companies can improve their AM Best ratings through strategic financial strength management.

How Insurers Can Improve Their AM Best Ratings

AM Best ratings motivate insurers to proactively manage financials. While year-over-year variation occurs, companies aim to boost ratings through:

Optimizing Balance Sheet Strength

Balance sheet management is key, including:

• Maintaining adequate liquidity and capital reserves
• Retaining sufficient reinsurance protection
• Controlling exposure to high-risk assets

Delivering Strong Operating Performance

Profitability must remain robust across market cycles via:

• Consistent underwriting discipline to avoid losses
• Multiple distribution channels and product lines to diversify
• Withstanding potential catastrophes and adverse events

Focusing the Business Profile

Optimizing business mix and structure, such as:

• Establishing competitive advantage and brand equity in target segments
• Broadening geographic diversification
• Pursuing scale through organic growth and acquisitions

Enterprise Risk Management

Taking proactive measures to identify, assess and mitigate risks through:

• Strong corporate governance and internal controls
• Ongoing stress testing and scenario analysis
• Forward-looking risk monitoring and strategic planning

While AM Best considers over 100 distinct factors, these core areas provide a blueprint for insurers to improve ratings. But why do ratings matter so much in the first place?comp

Why Do AM Best Ratings Matter for Insurers?

AM Best ratings provide insurers with several benefits that make striving for top grades worthwhile:

• Win Business – Strong ratings instill confidence in customers to purchase policies. This competitive advantage aids customer acquisition and retention.
• Enhance Reputation—High ratings elevate the brand’s reputation as a financially steady insurer that is better able to pay claims.
• Favourable Terms – Top ratings can unlock access to lower-cost reinsurance, credit and investments.
• Motivate Improvement – The goal of raising their rating drives insurers to optimize financials and risk management.
• Compare Performance – Ratings allow benchmarking against competitors, revealing relative strengths and weaknesses.

While influencers like market conditions also impact results, favourable AM Best ratings provide insurers meaningful advantages in the marketplace.

How Canadian Insurance Consumers Can Use AM Best Ratings

For insurance buyers, AM Best ratings offer valuable third-party assessments of insurers’ financial strength and ability to pay claims. Integrating ratings into the insurance purchasing process helps consumers make astute choices.

Simplify Apples-to-Apples Comparisons

AM Best ratings let consumers easily compare insurers’ financial standings using an independent source. Standardized metrics allow “apple-to-apple” comparisons that are not feasible otherwise.

Gain Insights on Financial Fortitude

Ratings provide meaningful perspectives on insurers’ financial health that are not available elsewhere. This empowers a more brilliant insurance selection.

Assess Claims Paying Reliability

Favourable ratings indicate a strong likelihood that insurers can sustainably pay claims at scale now and into the future.

Understand Limitations

Ratings focus specifically on financial strength. Other factors like customer service and ownership structure also impact insurance decisions.

Consider Alongside Other Information

Ratings offer one helpful perspective to incorporate alongside other inputs like policy offerings, prices and third-party reviews.

While not guaranteeing future stability, AM Best ratings offer consumers a useful benchmark for comparing insurers’ financial standing.

Why AM Best Ratings Matter in the Canadian Insurance Marketplace

The presence of AM Best ratings benefits the entire Canadian insurance ecosystem:

For Policyholders

• Enables smarter insurance decisions using impartial insights
• Provides confidence in insurers’ financial durability
• Motivates insurers to sustain fiscal rigour and claims-paying ability

For Insurers

• Sets consistent industry benchmarks for financial strength
• Drives companies to optimize capital, risk management and profitability
• Allows performance comparisons to peers
• Rewards strong financial stewards with marketplace advantages

For the Industry

• Promotes transparency around insurer finances
• Raises the bar for fiscal soundness and solvency
• Ensures minimum standards for balance sheet strength
• Discourages excessive risk-taking, which may endanger policyholders

By rewarding solid financial management, AM Best ratings elevate standards and stability across Canada’s insurance sector.

How Often are AM Best Ratings Updated?

AM Best rigorously monitors the insurer’s financial strength on an ongoing basis. While comprehensive rating reviews occur annually, interim quarterly assessments also occur.

Ratings can be revised at any time in cases of sudden events impacting an insurer’s operations or balance sheet. Companies may be placed “Under Review” when rating implications are uncertain.

Overall, AM Best ratings provide timely, current perspectives through continuous monitoring and data inputs.

AM Best’s Role as a Global Insurance Ratings Leader

With roots dating to 1899, AM Best has deep expertise in assessing insurer strength forged over decades. Today, their ratings and analysis extend beyond Canada to insurers worldwide:

• Monitors over 3,500 insurers across 90 countries
• Maintains physical presence in the United States, United Kingdom, Europe, Middle East, Asia and Latin America
• Analyzes insurance groups, captives, reinsurers and alternative risk vehicles
• Issues International Credit Ratings on over 400 insurers and debt instruments
• Publishes global research on insurance markets and financial risk

Coupled with its Canadian ratings coverage, AM Best’s international presence further reinforces its stature as the insurance industry’s preeminent global rating authority.

While AM Best focuses solely on financial strength, J.D. Power also assesses the customer satisfaction and service quality of insurers. Much like AM Best ratings provide transparency on financials, J.D. Power ratings offer insights on the consumer experience side. Check out our related guide explaining J.D. Power’s ratings and rankings for Canadian insurance providers.

Conclusion: The Value of Understanding AM Best Ratings in Canada

AM Best ratings empower consumers by revealing which insurers have financial fortitude versus fragility. They provide an independent view of balance sheet strength free of insurer marketing claims. For insurers, AM Best ratings incentivize maintaining ironclad finances to deliver on promises to policyholders.

AM Best ratings promote transparency and fiscal discipline in Canada’s insurance market. While not the sole criterion for choosing coverage, evaluating AM Best ratings helps protect Canadians by steering businesses to insurers with enduring financial strength. By informing smarter insurance decisions, AM Best ratings support the vital socioeconomic role of insurance in providing financial safety and peace of mind. Learn more about picking the right coverage for your needs at lifebuzz.ca.

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