How to Evaluate an Insurance Company’s Financial Strength

13 November 2025

Let’s be real—insurance isn’t the most exciting thing to think about. But when it comes to your money, your home, your health, or even your life, it matters a lot who’s holding the safety net. That’s why knowing how to evaluate an insurance company’s financial strength is such a big deal. Because when things go sideways, you want to be sure they can actually pay out.

So, how do you even begin to figure that out? Don’t worry, we’re about to break it all down in a way that actually makes sense—and maybe even makes it (dare we say) kind of interesting.

Why Financial Strength Matters (More Than You Think)

Picture this: You’ve been faithfully paying your premiums for years. Then—bam!—a major life event hits. Maybe it’s a car accident, a medical emergency, or severe storm damage to your house. You file a claim, expecting help… then find out the company is in financial trouble and can’t pay you.

Total nightmare, right?

Financial strength is the company’s ability to meet its long-term obligations—that means paying claims, even in tough times. A strong insurer has the assets, reserves, and cash flow to do exactly that. So, before you pick any old insurance provider based on cute commercials or low premiums, it’s worth digging a little deeper.

1. Start With Insurance Rating Agencies

If insurance companies had report cards, rating agencies would be the teachers grading them. These agencies evaluate companies based on their financial health, and they use a letter-grade system that makes it easy to see who’s doing well and who’s barely scraping by.

Key Players in the Rating Game:

- A.M. Best – Specializes in insurance companies only
- Standard & Poor's (S&P) – Looks at global financial strength
- Moody's – Evaluates creditworthiness
- Fitch Ratings – Another trusted source for financial credibility

These agencies look at a bunch of information, like financial statements, claim reserves, debt levels, and more. Then they assign a rating like A++, A, B+, or even lower. As you can guess, the higher the rating, the better.

> 💡 Tip: A rating of "A" or higher typically indicates a strong company. Anything below B? That’s a red flag.

2. Check the Company’s Financial Statements (Yes, Really)

Okay, I get it—“financial statements” sounds boring and maybe even a little intimidating. But stick with me. You don’t need an accounting degree to make some sense of them.

Here’s what to look for:

Balance Sheet

This will show you the company’s assets (what they own), liabilities (what they owe), and policyholder surplus (the cushion they have for emergencies).

If the liabilities are more than the assets? That's like spending more money than you make every month—definitely not sustainable.

Income Statement

This tells you if the company is profitable. Are they gaining more from premiums and investments than they’re paying out in claims and expenses?

Cash Flow Statement

Think of this like monitoring your own bank account: is there enough money actually coming in to keep up with payouts? Strong and steady cash flow is a great sign.

You can often find these reports on the company’s website under “Investor Relations,” or you can request them directly.

3. Try the NAIC and State Insurance Departments

The National Association of Insurance Commissioners (NAIC) is like the Google of insurance info. Their website allows you to look up a company’s complaint history, financial data, and licensing status.

They also have something called the Financial Solvency Oversight Program, which keeps tabs on insurers’ financial stability.

Also, each state insurance department has resources you can use. These agencies regulate companies operating in their state, and they publish helpful information about licensing, complaints, and enforcement actions.

> ⚠️ If an insurer isn’t properly licensed in your state, steer clear—there’s a reason for that.

4. Understand the Risk-Based Capital (RBC) Ratio

Ever heard of Risk-Based Capital (RBC)? It's a mouthful, but it’s a VERY telling number.

RBC measures how much capital a company has relative to the amount of risk it’s taking on. Think of it like a buffer zone. The higher the RBC ratio, the more financially stable the insurance company.

Here’s a cheat sheet:

- RBC ratio above 200% = Strong
- 150% to 200% = Adequate, but keep your eyes peeled
- Below 150% = Might be time to run, seriously

Companies must maintain a minimum RBC ratio set by regulators. Falling below that minimum can mean the state steps in—and not in a good way.

5. Look at Reserve Practices (a.k.a. Their Safety Net)

Reserves are like the “just in case” piggy bank for insurers. These are funds set aside to pay insurance claims—especially the ones that are complex or happen years down the line.

If an insurance company skimps on its reserves, it’s kind of like skipping car maintenance. Things might seem fine for a while… until they very much aren’t.

So how can you know if their reserves are solid?

Check the financial statements and see if the company’s reserves are growing in line with its business. Stagnant or dropping reserves while new policies are booming? 🚨 That’s a potential red flag.

6. Evaluate Their Claim Payout History

Here’s something companies can’t fake: their actual behavior over time.

A company with a strong financial profile should have a solid claim payout history. This includes:

- Paying claims quickly
- Paying claims fairly
- Handling disputes professionally

You can check this by looking at online reviews, Better Business Bureau ratings, or even asking your state’s insurance department for complaint ratios.

> 🤔 Got a friend or coworker who’s filed a claim with the company? Ask about their experience—it’s the most honest feedback you’ll get.

7. Consider Longevity and Market Reputation

Would you trust a brand-new company with your life insurance policy? Probably not.

A company that’s been around for decades—or even centuries—has already proven it can survive market crashes, economic downturns, and curveballs like pandemics. That kind of longevity speaks volumes about financial staying power.

Add to that a positive market reputation, and you’ve got a winner.

Look at these factors:

- How long have they been in operation?
- Have they grown responsibly?
- Do other financial institutions or large organizations trust them?
- Do they have a history of customer satisfaction?

8. Don't Be Blinded by Low Premiums

We all love a deal. But when it comes to insurance, cheaper isn’t always better.

Ultra-low premiums might mean the company is cutting costs somewhere—possibly in claims service, technology, or, worse, their financial safety net.

Sure, everyone wants to save money. But if a company can’t afford to pay your claim, that “savings” ends up costing you more in the long run.

> 💡 Think of it like going cheap on parachute gear. It’s not the place to cut corners.

9. Ask Your Financial Advisor or Insurance Agent

If all else fails and you’re still unsure, bring in reinforcements.

Financial advisors and independent insurance agents deal with this stuff every day. They often have inside knowledge or access to tools and databases the average consumer doesn’t.

They can give you a shortcut to understanding which companies are strong, stable, and trustworthy—and which aren’t worth the risk.

Just make sure they’re not tied to a single insurance provider, or their advice might be a little... biased.

Wrapping It Up: Peace of Mind Comes From Preparation

Evaluating an insurance company’s financial strength might sound complicated, but it doesn’t have to be. It’s really about doing a little homework, asking the right questions, and knowing what red flags to watch out for.

When you find a financially strong insurer, you’re not just buying a policy—you’re buying peace of mind. That’s worth its weight in gold.

So, next time you’re shopping around, skip the catchy slogans and focus on what truly matters. Because when push comes to shove, those financial ratings and balance sheets are the difference between security and stress.

Quick Checklist Before You Choose an Insurance Company:

- ✅ Check ratings from A.M. Best, Moody’s, S&P, and Fitch
- ✅ Review financial statements (especially balance sheets and reserves)
- ✅ Look into complaint history with NAIC and your state insurance department
- ✅ Evaluate RBC ratio and claim payout history
- ✅ Consider the company’s longevity and reputation
- ✅ Don’t be tempted by premiums that seem too good to be true
- ✅ Talk to trusted advisors or agents for a second opinion