AM Best Rating

Overview

An AM Best Rating is the insurance industry's primary measure of a carrier's financial strength and creditworthiness. Published by AM Best Company — the oldest and most widely recognized insurance rating agency — these ratings assess an insurer's ability to pay claims and meet financial obligations to policyholders. In COI compliance, AM Best ratings are used to evaluate whether the insurance carriers backing a vendor's coverage are financially sound.

How It Works

AM Best evaluates insurance companies based on a comprehensive analysis of their financial condition, operating performance, and business profile. The rating process examines:

• Balance sheet strength: Capital adequacy, reserve adequacy, asset quality, and reinsurance programs.
• Operating performance: Underwriting profitability, investment returns, and revenue diversification.
• Business profile: Market position, geographic and product diversification, and management quality.
• Enterprise risk management: How well the company identifies, measures, and manages risk.

AM Best's Financial Strength Rating (FSR) scale includes:

• A++ (Superior): Strongest financial position
• A+ (Superior): Very strong financial position
• A (Excellent): Strong financial position
• A- (Excellent): Strong financial position
• B++ (Good): Adequate financial position
• B+ (Good): Adequate financial position
• B and below: Marginal to poor financial position

Each rating also carries a Financial Size Category (FSC) designated by Roman numerals (I through XV), indicating the company's surplus size. Common contract requirements specify both the rating and a minimum size category.

AM Best also assigns outlook indicators — Positive, Negative, or Stable — and may place ratings "Under Review" when significant developments warrant reassessment.

Compliance Relevance

AM Best ratings are one of the most frequently specified compliance requirements in commercial contracts:

• Minimum rating requirements: Contracts commonly require coverage from carriers rated "A- VII" or better by AM Best. This means a Financial Strength Rating of at least A- (Excellent) and a Financial Size Category of at least VII ($100-250 million in surplus).
• Certificate cross-reference: The ACORD 25 lists the carrier name and NAIC number for each policy. Compliance teams use this information to look up the carrier's AM Best rating and verify it meets the contractual minimum.
• Rating changes: Carrier ratings can change during a policy period. A downgrade below the contractual minimum may trigger a requirement for the vendor to switch carriers.
• Non-rated carriers: Some smaller or specialty carriers are not rated by AM Best. Contracts that require an AM Best rating effectively exclude these carriers, which may affect surplus lines placements.
• Multiple rating agencies: While AM Best is the standard for insurance, some contracts accept ratings from Standard & Poor's, Moody's, or Fitch as alternatives.

Example

A property management company requires all vendors to carry insurance from carriers rated A- VII or better by AM Best. A vendor submits a COI showing General Liability coverage from "National Indemnity Company." The compliance team verifies the carrier's AM Best rating is A++ XV (Superior, the highest possible), confirming it exceeds the minimum requirement. However, the same vendor's Professional Liability is from a carrier rated B+ VI. This is flagged as a deficiency because B+ is below the contractual minimum of A-.