The Problem with Ratings and the Comdex solution

Ratings have become one of the most important pieces of information about a life insurance company. Ratings provide a convenient reference point from which to judge the financial health of a company. Ratings also provide a way to compare one company to another.

Unfortunately, ratings are not easy to understand. The biggest problem is that there is not a universal scale used by the rating services. Because rating services, in essence, are competing with each other, each service tries to differentiate itself from the others. Two services use the ” A through F” scale that we used in school. However they do apply it very differently. The two other rating services use the same “triple-A” scale that they use in rating bonds.

There is also the problem of “crossover,” where the same letter rating is used by two different rating companies and has two different meanings. For example, an “A+” from Best is the second highest rating that can be assigned, and is not considered an excellent rating. Comparisons of letter ratings between the rating

The Solution to the Problem

In order to clear up this confusion, it is necessary to take a step back from the letter ratings themselves. The actual letter rating that is assigned to a company is not as important as the number of companies that are rated higher or lower then the company.

A better way to look at the ratings is to look at the percentiles that the ratings represent. The percentile gives the percent of insurers that are ranked lower than a given company. If a company is in the 80th percentile, 20% of the companies are ranked higher and 80% are ranked lower. This is the common way of reporting test results for most national student testing. When considering a large number of students, the absolute test score is not as important as the percentile, the percentage of students that scored better and the percentage of students that scored worse.

The Comdex is Not a Rating

which is the average percentile of a company’s ratings.The Comdex is not a rating itself, but a composite of all the ratings that a company has received. The Comdex ranks the companies, on a scale of 1 to 100, in relation to other companies that have been rated by the services. The Comdex is an effort to reduce the

How is the Comdex Calculated?

To calculate the Comdex, the percentiles for each rating service are determined. That starts by counting the total number of companies rated by the service. Next the number of companies in each rating category is counted. From that data, the percentile for each rating category is calculated. For Example, take a sample rating service and calculate the percentiles. The Super Rating Service assigns ratings in five categories, A, B, C, D and E. It has rated a total of 50 companies as shown below. The percentiles would be calculated as follows:

A table of percentiles is constructed for each of the rating services. Using these tables, the Comdex for a given company can now be calculated. Each rating that the company has received is taken into account, and the percentile in the table for that rating service is looked up. Then the percentiles are averaged and the number of ratings is factored into the equation to arrive at the Comdex.

NOTE: A company needs to be rated by at least two rating services to receive a Comdex. The Comdex is based on the ratings issued by the following rating services: A.M. Best, Standard & Poor’s, Moody’s Investors Service and Fitch.
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