AM Best Rating: Definition and How It Works

An AM Best rating is an independent opinion issued by AM Best Company — a credit rating agency specializing exclusively in the insurance industry — that assesses an insurer's financial strength and its ability to meet ongoing policy obligations and pay claims. AM Best was founded in 1899 by Alfred M. Best and is headquartered in Oldwick, New Jersey. It is the oldest and most widely referenced insurance-specific rating agency; AM Best ratings appear in carrier selection standards across commercial insurance programs, lender requirements, government contracts, and surplus lines placements worldwide.

The Financial Strength Rating Scale

AM Best's Financial Strength Rating (FSR) is the primary carrier-quality indicator used in day-to-day insurance placement. The scale runs from A++ (Superior) to D (Poor), with an additional "S" (Suspended) and "NR" (Not Rated) classification:

For most commercial insurance placements, an AM Best rating of A- (Excellent) or better is the widely accepted minimum threshold. Programs, contractual requirements, and lender covenants routinely specify A-/A or better as a condition of acceptable coverage. Carriers below A- carry meaningfully elevated financial risk and are generally avoided for placements where the insured has no guaranty fund backstop — most notably surplus lines and stop-loss insurance.

Financial Size Category

In addition to the FSR, AM Best assigns a Financial Size Category (FSC) — a Roman numeral from I (smallest) to XV (largest) — based on the carrier's adjusted policyholder surplus (a measure of net assets available to pay claims). The FSC appears alongside the FSR, producing a combined notation such as A-/XV or A+/X. The FSC does not directly measure quality; it reflects the carrier's capacity to absorb large losses or write high-limit policies.

Common minimum FSC requirements in commercial programs are VIII ($100M–$250M surplus) or X ($500M–$750M surplus). For high-limit or complex risks, a carrier may be financially sound (A+ rated) but lack the surplus capacity to write the required limits without co-insurance or reinsurance support.

Long-Term Issuer Credit Rating

Separately from the FSR, AM Best issues a Long-Term Issuer Credit Rating (ICR), expressed on an alphanumeric scale mirroring major rating agencies: aaa (Exceptional) to d (In Default). The ICR addresses the carrier's creditworthiness as a debt issuer rather than its claims-paying capacity as an insurer. The FSR is the rating that matters for insurance placement decisions; the ICR matters primarily to bond investors and financial counterparties.

How AM Best Derives Its Ratings

AM Best evaluates insurers using a combination of quantitative and qualitative factors under its Best's Credit Rating Methodology (BCRM):

• Balance sheet strength — capitalization, asset quality, reinsurance dependence, reserve adequacy, and financial flexibility. This is the foundational component; a carrier with inadequate reserves or low surplus will not achieve a high FSR regardless of other factors.
• Operating performance — underwriting profitability (combined ratio), investment income stability, and earnings consistency over multiple underwriting cycles.
• Business profile — market position, distribution breadth, geographic and product diversification, and management quality.
• Enterprise risk management — the strength of the carrier's risk identification, monitoring, and mitigation framework.

Ratings are reviewed annually and can be affirmed, upgraded, downgraded, or placed under review (designated "Under Review — Positive," "Negative," or "Developing") when significant events occur — a large acquisition, catastrophe losses, reserve strengthening, or a material change in capitalization.

Why AM Best Ratings Matter for Insurance Brokers

Carrier selection due diligence. Before recommending a carrier — admitted or non-admitted — brokers should verify the current AM Best FSR. Carriers below A- present elevated insolvency risk. For non-admitted (surplus lines) carriers, this verification is especially critical because state guaranty funds do not cover policyholders when non-admitted carriers fail; the insured's only recourse is an unsecured claim against the carrier's insolvent estate. See Placing Hard-to-Insure Risks in the Surplus Lines Market for the full surplus lines placement workflow.

Contractual and program compliance. Many commercial insurance programs — wrap-up programs, lender-required policies, contractor certificates, and government contracts — specify minimum carrier ratings by contract. A broker who places coverage with a sub-rated carrier in violation of a contractual requirement exposes both the client (uncovered claims if the program rejects the carrier) and themselves (E&O liability). Confirm rating requirements before binding, not after.

Stop-loss and self-funded plan placements. Stop-loss carriers are not subject to state guaranty fund protection the way licensed health insurers are. An employer self-funding its health plan has no backstop if the stop-loss carrier fails. Minimum A- AM Best rating is the standard floor for stop-loss placement. See Stop-Loss Insurance for Self-Funded Plans for the carrier selection and underwriting considerations.

Client-facing documentation. Written renewal analysis and coverage recommendations should include the AM Best rating of each quoted carrier alongside premium and coverage terms. This documents the broker's due diligence and demonstrates that financial strength, not just price, was part of the placement rationale. See Handling Renewal Premium Increases for how to structure the carrier comparison in a client renewal presentation.

Monitoring in-force placements. AM Best ratings can change mid-policy year. Brokers with clients placed at carriers that subsequently receive a downgrade or an "Under Review — Negative" designation should proactively evaluate whether moving the risk to a higher-rated carrier is appropriate, particularly for long-tail lines where claims may emerge years after policy expiration.

How CPAs Use AM Best Ratings

Captive insurance due diligence. When a client operates or is considering a captive, CPAs should understand that captives typically operate as non-admitted carriers and may not carry a formal AM Best rating. The absence of a rating does not automatically disqualify a captive for tax purposes, but it is relevant to the risk management analysis and should inform how the captive's financial strength is monitored. See Captive Insurance for the broader structure and tax treatment framework.

Insurance procurement guidance. CPAs who advise closely held businesses on risk management — including key person insurance, buy-sell funding, and property and casualty coverage — can use AM Best ratings as a baseline screen when reviewing their clients' existing coverage. A client holding a large life insurance policy at a carrier rated B or below warrants a conversation about carrier creditworthiness.

Stop-loss and benefits plan advising. CPAs advising owner-employees of businesses considering self-funded health plans should flag the AM Best carrier requirement as a non-negotiable due diligence step — the self-funded plan's tax-preferred status under IRC §501(c)(9) and ERISA does not substitute for the financial protection that a highly rated stop-loss carrier provides.

Related Terms

• Admitted Carrier — admitted status and AM Best rating are independent measures; a carrier can be admitted in all 50 states but carry a below-investment-grade AM Best rating
• Stop-Loss Insurance for Self-Funded Plans — stop-loss is not state-guaranteed; AM Best A- minimum is the standard floor for carrier selection
• Placing Hard-to-Insure Risks in the Surplus Lines Market — surplus lines carriers are non-admitted and lack guaranty fund protection; AM Best verification is essential
• Captive Insurance — captives typically operate as non-admitted carriers; AM Best ratings context applies to excess coverage above captive retentions
• Self-Insured Retention — understanding carrier ratings matters when selecting the commercial excess carrier sitting above a retention or captive layer