How to assess the financial strength of an insurance company (2024)

FAQs

How to assess the financial strength of an insurance company? ›

Financial Stability Ratings ® (FSRs) are a leading indicator of the financial stability of an insurer. The rating process provides an objective baseline for assessing solvency based upon changes in financial stability, as manifested in an insurers' balance sheet.

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

Ratings provided by independent rating agencies are often used as an indicator of financial strength. Insurance financial strength, or claims paying ability ratings, were first introduced in the early 1970's, in response mainly to policyholder interest in such matters following several serious failures at that time.

The S&P Insurer Financial Strength Rating system indicates whether an insurance company has sufficient assets to pay its claims. The highest S&P rating is AAA. AA, A, or BBB are considered acceptable ratings. Consumers can compare an insurer's rating from four sources.

Typically, financial strength is measured by cash flow ratios. The overall cash flow of any business tells whether that business is generating what it needs to sustain, grow and return capital to owners.

At its most basic level, financial strength is the ability to generate profits and sufficient cash flow to pay bills and repay debt or investors. Most business owners are focused on generating sales to increase profitability, however, sales alone do not build financial strength.

The process consists of analyzing four critical financial statements in a business. The four statements that are extensively studied are a company's balance sheet, income statement, cash flow statement, and annual report.

three most important elements of a company's financial strength are its assets, liabilities, and owners equity. Three other key financial elements for a business are the amount of sales, expenses, and profits. A company reports its assets, liabilities, and owner's equity on the balance sheet.

Another way to assess insurer financial performance is to look at medical loss ratios (MLRs), or the percent of premium income that insurers pay out in the form of medical claims.

How do I check the rating of an insurance company? ›

Financial statements used in evaluating overall financial performance include the balance sheet, the income statement, and the statement of cash flows. Financial performance indicators are quantifiable metrics used to measure how well a company is doing.

Financial strength ratings indicate trustworthiness, that the company can maintain its claims-paying ability promise for policyholders, providing the essential peace of mind that life insurance is supposed to offer.

Balance Sheet Analysis

Analyzing the Balance Sheet reveals important information, such as the company's liquidity, debt levels, and net worth. For example, a more significant proportion of assets than liabilities indicates a financially stable company.