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Ratings or Rates: When You Can’t Have Both Which One Do You Choose?

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Insurance company ratings or current annuity rateswhich R trumps the other? I don’t know about you but I’m hearing this question more than ever before. We all want to get the best annuity rate we possibly can for our clients but when the carrier rating is the trade-off, what is really best?

Such questions are even further complicated, in my opinion, by the fact that there are five major ratings firms (Standard & Poor’s, Fitch Ratings, A.M. Best, Moody Investors Service and Weiss Ratings) that issue financial strength ratings for insurance companies. Each one is slightly different and their rating categories can also differ, i.e., an A+ from one may not mean the same as an A+ from another and some don’t have an A+ rating at all. I don’t think anyone is saying that it’s easy to understand or easy to explain to a client but is it important? I, for one, think it is. Here’s why:

First, ratings should help us support our insurance carrier recommendations to our clients and their ultimate decision to buy protection coverage or invest in their future financial well-being. These ratings are from independent third parties whose evaluation should help all parties determine the ability of an insurer to fulfill its financial obligations. In addition, having multiple carrier ratings available can provide valuable comparison benchmarks.

Second, a company’s rating should be a barometer of its ability to pay claims. The higher the rating the more the independent third party rating firm, in their opinion, believes in the ability of the company to meet their on-going obligations. Simply put, a high rating indicates the company has the assets and reserves needed to pay claims. 

In addition, there are many different factors that can impact a rating. Obviously, when an insurance company’s rating goes up that’s a good thing. We all understand that or at least that is what we have been taught. When a company’s rating goes down any number of factors could have contributed, such as “bad” financial decisions, the company is losing money, a merger, etc. If a “lower” rated company is reevaluated by a ratings firm and the rating doesn’t go up, how should that be viewed? In this situation, isn’t the ratings firm saying that the assets and reserves of the company have not improved? Should we really recommend this carrier to our clients over carriers that are viewed more favorably? 

We would all agree that ideally both strong ratings and high rates are optimal, and adding strong compensation delivers the trifecta. Realistically, however, the current environment is impacting investment options, interest rates are at a new low and insurance companies have to make tough decisions to simply maintain ratings today. In turn, we have to ask ourselves which is best for our clientsa lower rated company with possibly higher annuity rates or a higher rated company with lower annuity rates? I sure don’t have all the answers but I do believe we need to think about it. It is the reality we face today. We need to be prepared to answer questions from our clients about the differences and make business decisions based on the environment we are in now.

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