In my last blog entry, I described the financial stresses under which many U.S. insurance companies are operating—and the very limited "safety nets" to bail out policyholders of insolvent insurers.
How can you evaluate the financial health of the companies you rely upon for insurance? And what are your alternatives if they don't pass financial muster?
Here are some practical suggestions:
Start by making a list of every insurance policy you own. That should include property & casualty insurance (auto, home, and business); life insurance; medical insurance (including long-term care insurance); disability insurance, along with any annuities you own issued by insurance companies.
Next, check the company's credit ratings directly from the leading credit rating agencies: Standard & Poor's, Fitch Ratings and Moody's. Credit ratings are far from perfect. Who can forget the hundreds of billions of collateralized debt obligations (CDOs) that went from AAA-rated to junk status in 2007 and 2008, literally overnight? But, they're a start.
Next, obtain a snapshot of each company's financial standing through the free ratings scanner at Weiss Ratings. The free service provides only a listing of the strongest and weakest insurance companies and banks, but for a nominal fee, you can obtain a summary report of an insurance company's financial health, capitalization, investment safety, profitability, liquidity, and stability. Unlike the mainstream rating agencies, Weiss Weiss doesn't accept compensation from the companies it rates for issuing the ratings and does not allow companies to influence the ratings they receive or to suppress the release of their ratings.
Many insurance companies are publicly traded. If any of your policies are from public companies, look at the trend in share prices using a tool like Yahoo Finance or Thestreet.com. Even the strongest insurers have been battered by the economic downturn. Don't panic if you see price declines in line with declines in the overall market (i.e. 30%-50%). However, many insurance companies have lost 90% or more of their market value in the last 12-18 months. If you own policies from one or more of these companies, it's safe to assume that major investors have dug into the company's financials and don't like what they see.
While you're looking at share prices, also review news stories about the company. Most online stock tracking services include news clips about each company you look up. If the insurance company isn't publicly traded, try to find news about it on a search engine. Look for news of credit rating downgrades, resignations of top officials, lawsuits, regulatory actions, etc.
Next, call each insurance agent or broker you've dealt with for each policy you own. Ask the agent or broker to review ratings data and other financial information (including media reports, annual reports, press releases, public filings, analyst reports, etc.) to evaluate the company's financial strength. A broker not tied to any particular company will be in a much better position to provide objective information. An employee of the company you're trying to evaluate obviously has a vested interest in keeping your business with that company.
If any of the companies are at risk, contact an insurance broker (not a company agent) to ask for recommendations to replace the policy. This is easiest for property and casualty insurance. To replace a life, medical, or disability insurance policy, you'll need to be in good health. Your premiums may rise significantly as well, especially if you're replacing a whole life policy you purchased many years ago.
If it's not practical to replace a life insurance policy from a weak company, you can at least borrow most of the cash value from it. You'll pay for this privilege—an 8% annual interest rate is typical. But if the insurer goes under, at least you'll have recovered some of your premium payments.
Cashing in an annuity policy can trigger big surrender charges along with tax penalties. To avoid the tax penalties, use a "Section 1035 exchange" with a more financially stable insurer.
Finally, look into alternatives to commercial insurance. If you have a successful business with substantial insurance premiums, you may be able to save money by setting up your own "captive" insurance company. Also consider insurance from more financially stable foreign carriers. While many foreign insurers won't cover risks outside their own country, some will. In countries like Switzerland, for instance, insurance companies are much more strictly supervised than in the United States.
Copyright © 2009 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society)
