Reserve, Ratings, and Security With corporations and their financial dealings coming under increasing scrutiny every day, it’s a relief to discuss an industry which has withstood such scrutiny for its lifetime. The insurance industry, because of its important role in the lives of its policy holders, is continually regulated and rated by both the state and federal governments, and by third parties. We’ll talk a little about regulation and the reserve system, and then we’ll dig into insurance company ratings. The Legal Reserve System Insurance doesn’t work if the company bites off more than it can chew; that’s just common sense. Insurance is a system which balances the risk that something bad might happen against how much that something might cost, and spreads that cost out across years. An insurance company must by nature be capable of handling the unexpected. To that end, a legal reserve system was instituted to protect the interests of consumers. In essence, the reserve system delineates a dollar amount which insurance companies must keep in reserve; just as you’d save cash for a rainy day, so the insurance company must save money for the rainy days of its policy holders. How that amount is calculated varies from state to state, and arriving at those numbers is a process so detailed we can barely touch on it here, but as with all insurance matters, it involves adequately predicting and balancing risk. Because reserve regulations vary from state to state, insurance companies must be licensed by individual states to operate in those states, and must therefore comply with the legal reserve requirements of each state in which the company is licensed. State regulators oversee their state’s reserve fund, and this system provides a degree of safety that is unparalleled in the investment community. Because these reserves are regulated at the state level, also, the insurance industry enjoys a status few industries share: they are not under the control of the federal government. In addition to legal reserve funds, states participate in guaranty funds which serve as yet another line of defense for policy holders. Ratings Organizations You’ve seen the letters and numbers and plusses and minuses following insurance company names (you can see them on AnnuiWeb in our Insurance Company Directory). These are ratings put out by third-party organizations which make it their duty to monitor the industry and report out, in the form of ratings, on each company’s solvency and strength. Not just a tool for interested consumers, these ratings are a powerful marketing tool for the insurance companies. Ratings are taken extremely seriously, and great care is used to prevent any ratings slippage. The first dominant rating company was A.M. Best, whose ratings provide essential information to consumers and marketers alike. Other well-respected ratings organizations like Moody’s and Standard & Poor’s began rating corporate bonds, and expanded to hedge into A.M. Best’s territory. These three companies now represent years of industry scrutiny and expertise. The chart below gives an idea of their ratings systems and what they mean. Standard Insurance Company Ratings Systems  A.M. Best  Moody’s  Standard & Poor’s  A++,A+  Superior; very strong ability to meet obligations  Aaa  Exceptional security  AAA  Superior; highest safety  A++,A+  Excellent; strong ability to meet obligations  Aa  Excellent security  A  Good security  AA  Excellent financial security  A  Good financial security  B++,B+  Very good; strong ability to meet obligations  Baa  Adequate security  BBB  Adeuate financial security  B,B-  Good; adequate ability to meet obligations  Ba  Questionable security; moderate ability to meet obligations  B  Poor security  BB  Adequate financial security; ability to meet obligations may not be adequate for long-term policies  B  Currently able to meet obligations, but highly vulnerable to adverse conditions All of the three ratings systems described in the above table do descend further to C and D levels, but the table should give you the gist of what a well-rated company will have as its listing.