Legal & Risk Transfer
AM Best Ratings for Subcontractor Carriers: What "A- VII" Really Means
Most insurance exhibits require carriers rated "A- VII or better" by AM Best. Few teams check the rating, and fewer know what the two halves of that phrase measure. A practical guide for COI reviewers.
- Published
- Reading time
- 5 minutes
In this article
Two ratings in one phrase
Insurance exhibits routinely require that each carrier be "rated A- VII or better by AM Best." The phrase packs two separate measurements together. The letter grade is AM Best's Financial Strength Rating, an opinion of the insurer's ability to meet its ongoing insurance policy and contract obligations. The Roman numeral is the Financial Size Category, a measure of the insurer's adjusted policyholders' surplus.
A- VII therefore means two tests: a Financial Strength Rating of A- (Excellent) or higher, and a Financial Size Category of VII, which corresponds to adjusted policyholders' surplus of $50 million to $100 million, or larger. A carrier can pass one test and fail the other.
Both halves come from the same source, but they answer different questions. The rating asks whether the company is likely to pay its claims. The size category asks whether the company is large enough that one bad year, or one large loss, is unlikely to change that answer.
The Financial Strength Rating scale
AM Best groups its ratings into secure and vulnerable bands. Ratings also carry an outlook (positive, negative or stable), and AM Best can place a rating under review when an event such as an acquisition or a large loss may change it. A negative outlook on a carrier rated exactly A- is worth a note in the vendor file. For contract purposes, the line that matters is usually A-: the secure band reaches down to B+, but few construction exhibits accept anything below A- without a specific exception.
- A++ and A+: Superior.
- A and A-: Excellent.
- B++ and B+: Good. These are the lowest ratings AM Best still treats as secure.
- B and B-: Fair. C++ and C+: Marginal. C and C-: Weak. D: Poor. These are vulnerable ratings.
- E: under regulatory supervision. F: in liquidation. S: rating suspended.
The Financial Size Category scale
Financial Size Categories run from I, under $1 million of adjusted policyholders' surplus, to XV, $2 billion or more. Category VII covers $50 million to $100 million, and VIII covers $100 million to $250 million.
Size matters because claims are paid out of surplus. A small carrier can be well managed and highly rated, but a $5,000,000 umbrella limit is a far larger share of a $60 million surplus than of a $2 billion one, and a single catastrophic construction loss can strain it. The size requirement is a rough guard against that concentration.
Exhibits that set only a letter grade, such as "A- or better", leave size unchecked. Keep both halves, and decide whether the threshold should be higher for umbrella and excess carriers that sit on top of large limits.
Why the certificate is not enough
The ACORD 25 lists each insurer by name and NAIC number. It does not show the rating. Ratings are assigned to specific insurance companies, and large groups contain many companies with different ratings, sizes and states of domicile. "Harborline Insurance Group" is not a carrier. The company that issued the policy is, and the NAIC number is the most reliable way to identify it.
The same applies to renamed companies and mergers. Carriers rename companies and move books of business between affiliates, so the name a broker types into a certificate can lag behind the company that actually issued the policy. When the name and the NAIC number disagree, the policy declarations settle it.
Two carrier types deserve a deliberate decision in the contract. Surplus lines insurers are common in hard-to-place contractor classes such as roofing and demolition, and many are well rated, but they are generally not backed by state guaranty funds. Risk retention groups generally sit outside guaranty funds as well, and some are unrated. Decide with your broker and counsel whether your exhibit accepts them, and on what terms.
Ratings change during the policy term
Ratings tend to be checked at intake and then forgotten, but a rating is an opinion that AM Best updates as the carrier's results change. A downgrade below your threshold in the middle of a policy term does not trigger any notice to certificate holders or additional insureds.
Your contract should say what happens if a carrier falls below the required rating during the term, typically that the subcontractor replaces the coverage with a qualifying carrier within a stated period. Have counsel set that period. Then monitor ratings continuously, so you learn about a downgrade from your own system rather than from a claim.
A downgrade does not cancel the policy or reduce its coverage. It changes the odds that a long-tail completed operations claim, paid years from now, is paid in full. That is why the usual remedy is replacement going forward rather than any attempt to reach back into the existing policy.
Checking ratings without slowing intake
Manual rating checks mean a lookup per carrier per certificate, which is why they get skipped. Pikorua Security extracts every insurer name and NAIC number from the ACORD 25, matches each one to its current AM Best Financial Strength Rating and Financial Size Category, and flags carriers below the contract threshold as a deficiency with the specific reason.
Set the threshold your contract states, and set it per coverage line if your exhibit treats the umbrella carrier differently from the primary. When a rating changes, affected vendors are re-checked and their status updates, and the broker receives the same specific request as for any other deficiency.
Make exceptions explicit. If a specialty subcontractor can only find coverage with a carrier rated B++, the decision to accept it belongs to the risk manager, in writing and with an end date, not to whoever happens to be reviewing certificates that week.
Related reading
About the author
Arjun Bhatia
VP Product, Pikorua Security
Arjun leads product at Pikorua Security, including the contract rule builder, AM Best checks and the renewal cadence. He previously built insurance platforms at Tata Consultancy Services.
The Risk Transfer Brief explains insurance and contract concepts in general terms. Pikorua Security is software, not a law firm, insurer or broker. For contract drafting, or a coverage position on a specific claim, work with your coverage counsel.