The Importance of Monitoring Carrier Financial Strength Ratings

Insurance agents play a key role in protecting their clients’ long‑term financial security, which makes it essential to place coverage only with carriers that demonstrate strong, stable financial performance. Rating agencies such as AM Best, Demotech, and S&P regularly review insurers’ financials and adjust ratings based on each carrier’s ability to meet ongoing obligations. These ratings can change at any time – and even well‑established carriers may experience downgrades.

Ongoing monitoring is important from an agency risk‑management standpoint. Agents are expected to use reasonable care in placing business with solvent, financially reliable companies, and that failure to stay informed about rating changes can create significant liability exposure and reputational damage for the agency.

Review the Associated Risks
The initial consideration should be whether it is appropriate to place business with a lower-rated or non-rated carrier. Agencies are advised to set a minimum rating standard and exercise caution before making exceptions. Any venture into new markets should undergo thorough review at the management level. It is also crucial to assess whether the benefits of using such markets justify the associated risks for your clients and your agency. If you decide to move forward, it is advisable to implement procedures designed to mitigate the risks faced by the agency.

Best practices within the industry include obtaining client acknowledgement when placing coverage with lower-/non-rated markets, assigning a designated person to monitor carrier financials, documenting rating changes, notifying clients when a carrier experiences a downgrade, and offering to remarket accounts when appropriate.

Client Communications
You must properly communicate with your clients concerning carrier ratings if you are placing coverage with a lower-/non-rated carrier or if a carrier experiences a downgrade. When possible, share higher‑rated carrier options alongside lower‑rated markets to help strengthen defenses and reduce exposure in the event of insurer insolvency.

If your agency chooses to place business with a lower‑rated or non‑rated carrier, clear disclosure is essential. Inform clients that the agency cannot guarantee the carrier’s future financial condition and advise clients of the potential risk of the carrier being unable to pay claims. It is recommended to have clients sign an acknowledgement of the carrier rating status and disclosure form of Placement With Lower‑Rated or Non‑Rated Insurance Carrier. 

If a downgrade does happen, it can create issues for your clients such as:

• Potential delays in processing claims
• Reduced ability to pay claims
• Possible liquidation or rehabilitation proceedings

What’s more, many commercial contracts and lender requirements mandate that insurance be placed with carriers holding a minimum AM Best or similar rating. If a carrier drops below the required minimum rating, the client may find themselves out of compliance with lease obligations, loan covenants, vendor contracts, or internal risk management standards.

When a downgrade happens, take the following steps to inform your clients and protect your agency:

• Identify all clients insured with the downgraded carrier
• Provide written notice to the clients explaining the carrier has been downgraded, what the rating means, and noting that the agency cannot guarantee the carrier’s future financial stability
• Offer to remarket the account to a higher-rated carrier
• Obtain written direction from the client on whether they want to stay with the downgraded carrier or move coverage to a higher-rated carrier

Access the following sample letter and acknowledgment form:

• Sample Carrier Downgrade Letter
• Sample Customer Carrier Downgrade Acknowledgement Form

IF YOU DON’T WATCH THE RATINGS, YOU WON’T SPOT THE RISKS.
When carrier ratings are not vigilantly monitored, agents risk exposing clients to unreliable insurers – and the consequences can be severe. A downgrade or insolvency not only delays or reduces claim payments, but also creates a chaotic flood of urgent tasks: remarketing accounts, issuing disclosures, and managing various client inquiries. Worse still, the agency’s reputation can be significantly impacted, with trust eroding fast if clients feel blindsided or abandoned. These failures invite E&O claims and can permanently damage client relationships, putting future business at risk and undermining the agency’s credibility.

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E&O Claim Example – Carrier Insolvency 

Scenario: An insurance agent places a small manufacturing client with a regional carrier rated “B-” by AM Best at the time of placement. The agent is aware the rating is lower than the agency’s preferred threshold of “A‑”, but the carrier offered competitive pricing and broad coverage. The agent does not document any disclosure to the client regarding the lower rating or the potential risk of financial instability.

Six months later, the carrier experiences rapid financial deterioration following a series of catastrophic losses. AM Best downgrades the company from “B-” to “C‑”, and then places it under regulatory supervision. A few months later, the carrier is declared insolvent and enters liquidation.

Claim Trigger: At the time of insolvency, the client has a recently opened property claim for a fire loss totaling $400,000. Because of the liquidation proceedings, the claim is delayed and ultimately only partially paid through the state guaranty fund – well below the full amount owed.

The client then files an E&O claim against the agency, alleging:

• The agent failed to warn them that the carrier was lower‑rated and financially unstable.
• The agent failed to monitor the carrier’s rating and notify them when the carrier was downgraded.
• The agent placed them in a position where insurance coverage could not be fully honored.

E&O Issues: During the investigation, the agency is unable to produce:

• Documentation showing the client was informed of the carrier’s rating at the time of binding
• Signed acknowledgement of lower‑rated carrier placement
• Any record of carrier rating monitoring or downgrade alerts
• Evidence that the client was offered alternative markets or advised of the risk

Outcome: The case could result in a $175,000 settlement, based upon the difference between the client’s loss and the guaranty fund payment, plus legal costs and reputational damage to the agency.

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RISK MANAGEMENT RESOURCES: Learn How Our Helplines Can Help 

Policyholders with the Utica National companies have access to two helplines: an Employment Practices Helpline and a Pre-Claims Assistance Helpline.

Employment Practices Helpline

• We have partnered with Jackson Lewis P.C., a law firm specializing in employment law, to provide this service.
• The firm can offer guidance on what to do if you may be faced with an employment practices claim, provide pointers on developing an employee handbook and advise what employment training is required by law.
• You are not required to carry our Employment Related Practices Liability Insurance to use this helpline.

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Pre-Claims Assistance Helpline

• We have partnered with Wood, Smith, Henning, & Berman, LLP, a national law firm, to provide this service.
• The helpline provides policyholders with up to 2 hours of legal consultation on any matter that could potentially result in a claim under your E&O policy.
• Please note: Claims cannot be reported using this helpline.

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