Can my insurance company pay all the claims?

The insurance industry is rated by A.M. Best Co. This company looks at trends for the insurance industry including property and casualty (home, auto, business, etc.), life, and reinsurance.

The insurance company that you use will have a credit rating assigned by A.M. Best Co.

A.M. Best has recently revised how it plans to apply its Natural Catastrophe Stress Test (NCST), potentially giving insurance companies leeway in meeting risk-adjusted capital requirements in the aftermath of a reasonably severe catastrophe.

This stress test considers a company's balance sheet risks and the increased reinsurance recoverables and reserves associated with a natural catastrophe. The test is designed to reflect a company's financial position shortly after a catastrophe event.

A.M. Best's financial strength ratings are based on the ability of a company to maintain certain minimum capital levels, as measured by Best's Capital Adequacy Ratio (BCAR). A.M. Best said in a press release, "As the (NCST) stress test reflects the financial conditions following an event, A.M. Best may allow the stress-tested (BCAR) score to fall below the minimum required capital levels."

Based on the assumption that the company can recover capital over the intermediate term, "the stress-tested BCAR score can fall to a maximum of 30 points below the minimum," the release says. An example is, an insurance company could remain at a financial strength grade of A++ if its stress-tested BCAR score falls up to 30 points below the minimum level of 175 required to maintain the A++ grade.

There are three considerations that the company uses when looking at this flexibility:

  • The organization's perceived financial flexibility: "Companies that are able and willing to replace lost capital immediately following an event will be afforded greater leeway with regard to the disparity in the standard BCAR and natural catastrophe stress test," the ratings agency says.
  • The historical volatility of the company's balance sheet and operating performance: "Companies with significant volatility in results will be afforded less tolerance in A.M. Best's view, as replenishing capital through earnings could prove difficult."
  • A company's exposure to multiple events in a season: "Those with exposure to more frequent severe events will be afforded less tolerance in the application of the stress test."

You can check out further information about your particular company by clicking here.