Living Prepared

14
Oct

Insurance Company Rating Agencies | Demotech vs. A.M. Best: Which is Better?

Insurance companies in coastal states, such as the Carolinas and Florida, are most often rated by the rating agencies, Demotech and A.M. Best. If you were to listen to both agencies, chances are they would both say they’re better than the other. Each agency uses their own financial strength yardstick for evaluating insurers, but which one has the best record?

For more than 100 years, A.M. Best has been recognized as the industry standard for insurance carrier ratings. In 1985, Demotech joined the ratings arena. Then, in 1990, Demotech was acknowledged by Fannie Mae & Freddie Mac for their ratings process, placing them in a position to compete with A.M. Best. However, it wasn’t until 1993, following the devastation of Hurricane Andrew and the failure of several property insurers in Florida, that Demotech was provided with a true opportunity.

In the aftermath of Hurricane Andrew, the Florida property insurance landscape changed. Investment capital was poised to enter the Florida market, but A.M. Best declined the opportunity to rate these new insurers. Enter Demotech, whose financial assessment methodology allowed for these ratings. Also, by this time, they were officially recognized by Fannie Mae & Freddie Mac.
Since then, Demotech has rated property insurers in catastrophe prone, mostly coastal states, including Louisiana, North Carolina, South Carolina, Texas and Florida.

In comparison to A.M. Best, Demotech claims a better track record and long-term solvency with insurers. Yet, some still contend that an A.M. Best rating is better. A.M. Best’s rating system leaves some markets with only very large national insurers. In the past (for instance, post-Hurricane Andrew), these major insurers cut back on the number of properties they would insure in coastal areas. To solve for this, smaller and appropriately reinsured insurers, have stepped in with Demotech’s ratings to fill the gaps left by the major insurers.

Overall, both Demotech and A.M. Best provide a valued rating service to policyholders and insurers.

Written by Scot Moore, Chief Financial Officer