Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 19, 2021

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Insurance is essentially a promise.  Your insurer promises to pay for any damages you become liable for in exchange for a monthly premium.

Similar to any other company in existence, insurance companies are exposed to losses just as they are profits.

Fortunately, most of the companies we work with are financially stable, and when things are going well, you can expect your rates to remain steady or even fall.

However, when good times turn to bad, such as in the event of a major catastrophe, insurance companies are forced to pay out several hundreds of millions of dollars at one time.

In this unfortunate situation, insurance companies use up almost all of their equity and may risk becoming insolvent.  In other words, not having enough money to pay for all of the potential claims they insure.

Individual state departments of insurance constantly monitor companies to make sure they are running profitably enough without gouging the consumer at the same time.

There are also independent companies that monitor insurers based on financial size, strength, and overall customer satisfaction.

Any of the following companies will be helpful in determining how financially stable your insurer is:

A.M. Best
Standard & Poor’s
Fitch Ratings
Better Business Bureau

When shopping for insurance, you may want to do your own research to see if the company you are considering is under review by these rating companies, or has been upgraded or downgraded recently.

This information may help you make a better decision.  If the insurance company you ultimately choose has recently been downgraded, they may need to raise insurance rates in the near future to make more money.

Worse yet, they could be on the road to insolvency, though that’s rather rare.

And even if things do take a turn for the worse, insurance companies are bonded, meaning other insurance companies, known as reinsurers, pay for claims in the event they are unable to do so.

If you plan to purchase insurance direct through an insurance company, you will probably have to do your own research, including asking friends, co-workers and relatives about their insurers and individual experiences.

If you purchase insurance through an independent agent, be sure to ask her or him for their opinion about the companies they are getting your quotes from.  And take your time to research the agents you are considering working with.

Also be sure to check out the top rated auto insurance companies, according to J.D. Power rankings.

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