Is Your Insurance Company Safe?

The standards used by each ratings service differ, and the ratings ultimately reflect the service’s opinion of the financial strength and claims-paying ability of the insurer–it is not a guarantee of future performance. The recent financial difficulties of some of the largest and oldest insurance companies may have you wondering about the financial strength of your insurer. Here are some sources of information that you can use to help you determine whether your insurance policy is safe. It’s in the ratings There are several rating services that review, evaluate, and rank insurance companies based on their financial strength and claims-paying ability. The primary players in the ratings game are A.M. Best , Standard & Poor’s , Fitch , Moody’s, and The Street.Com (formerly Weiss). The standards used by each ratings service differ, and the ratings ultimately reflect the service’s opinion of the financial strength and claims-paying ability of the insurer–it is not a guarantee of future performance. So you should consider your insurer’s ratings from at least two or more services to determine its financial strength. State regulation Insurance companies are heavily regulated by the states in which they are headquartered. Generally, each state requires that an insurer has sufficient reserves to pay all of its claims. In addition, states require that companies file updated financial reports that often are available to the public through the state’s insurance department. Check with your state’s department of insurance for information about the company maintaining your policy. Important financial information While financial ratings are important, there are other sources that provide financial information about your insurer. For instance, the National Association of Insurance Commissioners NAIC is an organization representing the insurance departments of all 50 states. You can access their information by going to www.naic.org. An important statistic contained in the NAIC’s financial report of each company is the assets to liabilities ratio. This statistic compares the insurer’s total assets to its total liabilities. For example, a favorable assets to liabilities ratio may be $108 of assets for each $100 of liabilities. Comparing companies Many insurers subscribe to the Standard Analytical Service, Inc., an independent organization that compares insurance companies based on financial statements filed with state departments of insurance. Many insurers publish the Standard’s reports on their websites. The reports compare insurers based on a few important statistics. One such statistic compares the ratio of an insurer’s bonds, stocks, cash, and short-term investments to liabilities. A higher ratio of liquid assets to liabilities may indicate the company’s ability to cover unforeseen emergency cash requirements if they arise. Another statistic compares an insurer’s surplus assets to life insurance in force. A high ratio of surplus to life insurance in force provides evidence of a company’s ability to meet its claims obligations. If you claim benefits from your policy during a period of extraordinary claims activity, will your insurer be able to satisfy your claim? The chances are better if the insurer has a high ratio of assets, including capital, to policy reserve liabilities. A high surplus ratio may indicate a company’s ability to meet its claims obligations even during a period of high volume. If the worst happens … If your company experiences severe financial difficulties, it might be taken over by If your company experiences severe financial difficulties, it might be taken over by the state’s insurance department. Generally, claims continue to be honored as long as premiums are current. If the company lacks sufficient assets and reserves to pay all claims, the state’s guaranty association will either pay claims directly or transfer the policies to a financially stable insurance company that will honor the claims. The National Organization of Life and Health Insurance Guaranty Association NOLHGA provides information on state guaranty associations and insurance companies that have failed or are in danger of failing.