What is the demotech rating scale?

The Demotech Financial Stability Rating® (FSR) scale uses letter symbols to measure a regional or specialty insurance company's financial stability and ability to meet policyholder obligations.

📊 Demotech Rating Categories

• A″ (A Double Prime): Unsurpassed financial stability.
• A′ (A Prime): Unsurpassed financial stability.
• A: Exceptional financial stability.
• S: Substantial financial stability.
• M: Moderate financial stability.
• L: Licensed by state regulatory authorities (but not formally rated for stability).
• NR: Not Rated.
• N/A: Ineligible for a rating due to incomplete data.

Demotech ratings are independent financial strength evaluations assigned to regional, smaller, and specialty insurance companies.

What is a Demotech Rating?

• Formally called Financial Stability Ratings (FSRs).
• Assesses an insurance company's ability to pay policyholder claims and survive severe economic or market downturns.
• Focuses on balance sheet strength, liquidity, loss reserves, and reinsurance quality rather than company size or overall profits.
• Accepted by major secondary mortgage markets including Fannie Mae and Freddie Mac, allowing homeowners with regional insurance to qualify for federally backed mortgages.

The Rating Scale

Demotech uses letter grades to indicate an insurer's level of stability:

• A″ (A Double Prime) / A′ (A Prime): Unsurpassed stability.
• A: Exceptional stability.
• S: Substantial stability.
• M: Moderate stability.
• L: Licensed, but not rated for stability.
• NR / N/A: Not rated or ineligible due to missing data.

You can check an insurer's status directly through the Demotech Official Website.

Demotech is not considered equivalent in strictness or scope to A.M. Best, as the two agencies use different methodologies, evaluate different types of companies, and apply distinct rating scales.

Key Differences in Scope and Scale

• A.M. Best: Founded in 1899, it is the global benchmark for the insurance industry. It evaluates large national and international insurers using a comprehensive scale ranging from A++ (Superior) down to D (Poor). A rating of B+ or higher from A.M. Best is widely considered the baseline for secure financial health.
• Demotech: Established in 1985, it is a smaller, nationally recognized statistical rating organization (NRSRO) that primarily issues Financial Stability Ratings (FSRs) for regional, niche, and smaller property-casualty insurers. Demotech's primary scale uses markers like A (Exceptional), S (Substantial), and M (Moderate).

Rigor and Insolvency Risk

• Standard of Evaluation: Independent analyses (including studies by academic researchers and reporting from outlets like The Wall Street Journal) have noted that a Demotech "A" rating is not as conservative as an "A" or even a high-tier rating from A.M. Best. Statistical data filed with regulators suggest that companies carrying a Demotech "A" have historically experienced higher default or insolvency rates compared to traditional higher-tier or mid-tier rankings from major global agencies.
• Market Necessity: Despite a less conservative historical track record, Demotech fills a crucial market gap. It rates smaller regional carriers—particularly in catastrophe-prone states like Florida—that larger agencies like A.M. Best traditionally choose not to evaluate. Major mortgage entities like Fannie Mae and Freddie Mac officially accept Demotech's Financial Stability Ratings, making them vital for property transactions where national insurers do not operate.

A good consumer insurance score (credit-based) generally falls above 700 to 770, depending on the scoring model used by the analytics company.

Because "insurance rating" can mean either your personal consumer insurance score (based on your credit history to predict claims) or an insurance company's financial strength rating (how safe the company is), both standards are outlined below.

1. Consumer Insurance Scores (Your Personal Score)

This is a three-digit score used by auto and home insurers to estimate your likelihood of filing a claim. It is derived from your credit report, though it weighs factors differently than a standard lending FICO score.

• LexisNexis Attract Scale (Range: 200–997):
  • Good / Excellent: 776–997 (Scores over 700 are generally considered good)
  • Average: 626–775
  • Below Average: 501–625
  • Poor: 500 or below
• FICO Insurance Score Scale (Range: 300–900):
  • Exceptional: Above 800
  • Good: 700–800
  • Risky / Low: Below 600

Note: States like California, Massachusetts, Hawaii, and Michigan restrict or ban the use of credit history when calculating personal auto or home insurance rates. Learn more about how these numbers work in the CNBC Guide to Insurance Scores.

2. Insurance Company Financial Strength Ratings (The Insurer's Safety)

If you are asking about a rating for an insurance provider itself (its ability to pay out future claims), agencies like A.M. Best use letter grades.

• Superior / Excellent (Good to Buy): A++ or A+ (Superior) and A or A- (Excellent)
• Good: B++ or B+ — These fall in the secure category, meaning a high likelihood of meeting obligations.
• Vulnerable / Poor (Avoid): B down to D/F — Indicates high vulnerability to economic shifts or risk of default.

Demotech ratings are widely accepted by mortgage lenders and state regulators, but independent studies show they may be less reliable than traditional agencies like A.M. Best.

Regulatory Acceptance

• Fannie Mae and Freddie Mac accept Demotech Financial Stability Ratings (FSRs) to approve home loans.
• State insurance regulators use these scores to check regional property insurers.
• Large rating agencies often ignore small or regional companies, leaving Demotech as a main option.

Reliability Concerns

• A 2023 study by Harvard, Columbia, and the Federal Reserve found that Demotech-rated insurers face a higher risk of failure than peers rated by A.M. Best.
• Reports from the Wall Street Journal showed that some top-rated carriers went bankrupt shortly after receiving a strong score.
• Critics argue that Demotech standards are less strict and miss underlying financial risks.

Company Defense

• Demotech leaders defend their ratings and long track record.
• They state that heavy lawsuits and legal actions cause company failures, not bad financial analysis.