Rate the Raters - is it the Rating Game or the Dating Game ?
This article may shed some light
on how the Rating Industry works
in the insurance biz here in this
country of ours.
I know of 5 rating agencies for life
insurance and annuity companies in
the United States.
Ambiguous Annuitants always study
the rating services thoroughly.
4 of these 5 are:
1. A.M. Best
2. Standard & Poors
Each of these companies has their
own scale in which to measure insurers.
Unfortunately, all 4 agencies have different methodologies on how they measure an insurers solvency. Because of this procedural variance issue, it can be difficult for consumers to figure out which company to choose, assuming of course that the subject of "company rating" is even important to that consumer (which of course it should be).
However, there is a statistically honest way to become clearer on the relative value of an insurance company's rating by simply knowing where the rating of that insurer lies in comparison to the other insurers that the agency rates. A "percentile score" (a numerical score out
of 100) can then demonstrate how many companies
have higher and lower scores than a particular
company within each agency's system. Our schools
often do this with the test results of their students.
Rather than judge a test score by its absolute result
(24 correct answers out of 25, for example), the
students score is often measured in "percentiles"
of how well that student did in relation to the other
students in the class.
So, if a student is in the 85'th percentile, he did better
than 85% of the students in his class.
Similarly, XYZ insurance company, for example, may be in the 85'th percentile of all insurers with Am Best, the 91'st percentile with Standard and Poors, the 81'st percentile with Moody's and 74'th percentile with Fitch. If you add the 4 results together, and divide by the 4 agencies, you get an average score, in this case, of 82.75. Thus XYZ Insurer is rated higher than 82.75% of all other companies.
The company that does all these calculations is the Ebix organization, a leading supplier of software and ecommerce applications for the insurance indutry, and the final result of their company specific evaluation is called the "Comdex Score". There are approximately 675 insurers in the US that are rated for Comdex evaluations, and of those, there are (at the time of this writing) 129 are above an 85 (on a scale of 1 - 100) or about 1 out of 5 insurers.
Also keep in mind, the Comdex evaluations are updated several times each year. You can buy the Comdex Score on a company for yourself, (or just ask me for it for free).
Also, the Comdex is not a rating; it is a composite score of at least 2, and as many as all 4, of the aforementioned rating agencies. (Some agencies do not rate some insurers).
The four rating agencies mentioned above not only rate insurance companies; they also rate and provide research on :
governments and government debt
real estate investment trusts (REIT's) funds
...the list goes on and on....And ratings agencies are businesses that get compensated in a variety of ways for the ratings that they tabulate. As such, they have come under some criticism (especially since the 2008 Sub-Prime crisis) as to how objective an agency can be if that same agency is compensated in some cases by the company whom it is tabulating a rating for... A fair question indeed !
However, a study of the ratings industry itself can be quite complex, time consuming and of a significantly larger scope than this lowly blog can accomodate. In addition, each agency, once again, has a different style of doing business.
However - not to dismiss this genuine concern, there is one more Rating Agency (#5 of 5) that does not receive any compensation from the entities to whom it rates, and that is the Weiss Ratings Agency. The Weiss Ratings Agency not only considers itself an indepedent adjudicator of institutional financial health, the company also tends to be a severe task master. Typically, a Weiss rating (their grading system is similar to your 6'th grade report card, from A+ down to an F), is usually a letter grade or more SOUTH of any one of the big 4 agencies respective grades.
Many insurance agents and agencies are often not familiar with
(nor friendly to) the use of the Weiss Ratings for the reasons just
mentioned. Agents might recognize, for example, that the public
might assume anything rated even a "B +" might be considered a
sub-par institution and thus not worthy of a propects hard earned
money. However, in reality, a "B +" from Weiss is actually a good
rating. However, I myself do use the Weiss system in conjunction
with the Comdex Score together, just so I have the clearest
conscience on what I am leading my clients into. Weiss also has a
good track record in forecasting institutional failures of the past
that they are proud to have you see, which I must admit can be
So, in conclusion, I hope you have learned something here. Since this subject is so important, I put absolutely zero humor in it. I hope you did not notice this, and laughed anyway.