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How are life insurance companies rated?

A:

Quick Answer

Life insurance companies are rated based on their creditworthiness, which is defined as their capacity to satisfy their continuing financial, contract and policy obligations, according to A.M. Best. As of 2015, A.M. Best rates insurance companies after evaluating their business profiles, operating performances and balance sheets.

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Full Answer

A.M. Best is an international agency that has been rating insurance companies since 1906. In addition to rating companies for their financial strength and issuer credit, A.M. Best issues debt ratings, which reflect the insurance company's capacity to pay its debt security holders. The agency also issues a national scale rating, which reflects the fiscal strength of an insurance company in a particular country, states A.M. Best.

The rating process includes a meeting between the insurance company management and A.M. Best rating analysts. The insurance company provides company goals, objectives and private information, such as internal practices. As many as a half dozen insurance company representatives attend the meeting, including top executives; they discuss issues such as corporate responsibility, investment strategy and financial projections. Insurance companies are asked to disclose plans for significant transactions, and A.M. Best holds all information in strict confidence. When a company has been previously rated, the rating analysts and company representatives meet to discuss any changes since the last review, according to A.M. Best.

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