If Your Insurance Company’s Not Financially Safe, Neither Are You

By Richard A. McGrath, CIC, LIA

It’s painfully clear that the financial crisis has had an impact on your investments, but it could be having a major impact on your insurance, too, and you may not realize it.

Like banks, many insurance companies have major holdings in toxic assets, such as mortgage-backed securities and auction-rate securities.  Along with the current downturn in business, holding these assets could make the survival of some insurance carriers questionable.

American International Group, Inc. (AIG), once the world’s largest insurance company, is the most visible example of an insurer facing financial challenges.  An $85 billion infusion of government cash in September failed to stabilize the company, so Congress raised the taxpayer investment to $150 billion in November.  It’s still unclear whether the investment will be enough to rescue the company.

But AIG is only one example.  Other insurers are also in trouble – and, unlike AIG, they may not receive a government bailout.

Why should you care?  If you have an insurance policy with a company that fails, your coverage could be compromised.  Claim settlements may take longer to settle.  Meanwhile, changes to your insurance program could be placed on hold.

How Insurers Are Regulated

Insurance companies are regulated by state agencies.  If an insurance company were in danger of failing, the state insurance commissioner or state agency might seek to 1.  transfer the assets to more stable companies or 2.  utilize financial guaranty funds.  Most states have a financial guaranty fund that insurance companies contribute to that backs up the policy obligations of any insurer that fails.

The consumer impact can be significant.  If another company assumes your insurance policy, you may have to pay higher premiums for the same level of coverage.  Claim payments could be delayed.  If a guaranty fund reimburses for benefits, it may not pay out the full amount you would be due if your original insurance carrier were still in business.  Limits also may vary from state to state.

In Massachusetts, for example, the Massachusetts Life & Health Insurance Guaranty Association (http://www.malifega.org/) will cover a death benefit of up to $300,000 and a cash surrender value of up to $100,000 per insured life.  It covers health insurance claims of up to $100,000 per insured life and annuity benefits based on their present value of up to $100,000 per contract owner.  The fund also reimburses premiums lost because of the insurer’s insolvency.  The association is not responsible for paying out more than $300,000 for any one person.

If you’re paying for coverage beyond the limits of the financial guaranty fund, you may not be fully reimbursed.

Checking Out Your Insurers

Given the potential risk of insurance companies failing, it is best to know the financial status of any company you’re buying insurance from.

One benefit of working with an independent insurance agent is that your agent should be keeping close tabs on the financial status of all insurance carriers his or her agency works with and should recommend working only with insurers that are financially stable.

In addition, you can check on the financial ratings of your insurance carriers by visiting the Web sites of insurance industry rating agencies or by going directly to the Web site of each insurance carrier.  Most carriers that are highly rated display their ratings prominently.

Rating agencies for the insurance industry include: A.M. Best (www.ambest.com), Fitch (www.fitchratings.com), Moody’s Investors Services (http://www.moodys.com/), Standard & Poor’s (standardandpoors.com) and Thestreet.com (Weiss) (www.weissratings.com).  Each company uses a different rating system, but the Web sites explain how the ratings work.  You will also have to register to use these sites.

If your present insurance carrier has a rating that alarms you, consider changing insurers – especially if the low rating is from an insurer providing coverage for cash-value life insurance, long-term care insurance or some other policy that you would like to remain in force over the long term.

If your insurance carrier is in financial trouble, it is important to continue paying premiums to keep your policy in force, even though you may not be allowed to cash in or borrow against your policies, except in hardship cases.

Can you trust the ratings from the rating agencies?  Keep in mind that the finance rating agencies for the country’s banking system were providing ratings indicating that the mortgage-backed securities that they invested in were sound.  Thus far, the rating organizations develop a “financial report card”, rating at some point in time, on an annual basis.  Financial changes can develop rapidly and annual review may not be sufficient.  Seeking additional advice from your independent insurance agent would be worthwhile to your financial protection.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.