Fred, I'm in the market for insurance, how can I tell a good company from a bad company? John in Kimberton
Dear John, Thank you for the question.
Consumers buying insurance, from auto to long-term care coverage, typically focus on the cost of premiums, the amount of coverage, quality of service and the policy's features. But amid the bear market, weak economy and threats of terrorism, many consumers are overlooking another key component: being sure the company issuing the insurance is financially healthy.
The Sept. 11 terrorists attacks and the continued threat of more attacks have particularly highlighted concerns about the future financial health of one segment of the insurance market: property/casualty. These carriers insure homeowners and businesses, and the carriers worry that they will go bankrupt if required to pay for damages from future terrorists attacks. The Homeland Security bill President Bush recently signed includes a provision that the U.S. government will financially back insurers in the event of such attacks.
But the risk of insolvency affects virtually all types of insurance, not just property/casualty. Companies selling life, health, auto, long-term care and annuities have reported financial problems, or at best, lower profits. They attribute much of the problem to poor stock market returns (insurance carriers invest a portion of policy holder premiums) and the weak economy.
Even in good times, however, any given insurance company can experience problems, so consumers need to ensure that they are buying policies from financially strong companies. Financially weak companies are more prone to raise premiums faster than more stable companies. Worst of all, a weak company may be unable to pay out benefits just when you need them.
To a limited extent, states protect consumers against the collapse of an insurance company. Staterun insurance departments will step in and try to find healthier carriers to buy out a floundering company. If that fails, and the company goes bankrupt, states will pay benefits out of guarantee pools funded by participant insurers. But the benefit payouts may be delayed, and not all insureds will receive the full benefits they are due. Furthermore, collapsed carriers force insureds out into the market, where they may have difficulties qualifying for or affording new coverage.
Furthermore, not all carriers participate in state guarantee programs. Self-funded plans, which pool member premiums to pay claims, don't participate. For example, a self-funded health insurance plan in New Jersey recently ran out of money, leaving some insureds with hundreds of thousands of dollars in unpaid medical bills. There also have been instances of fake insurance companies and fake associations set up to sell insurance.
To minimize the risk of one or more of your insurance companies becoming insolvent, start by working with your financial advisor and a knowledgeable insurance agent. They can identify the strongest carriers.
Don't be too cheap. The financially healthier companies often have higher premiums, but the higher costs may turn out to be less in the long run than picking a cheaper but weaker company that can't pay when you need it.
Check out the insurance rating services. These firms rate the financial stability of carriers by examining the financial data the companies must provide to state agencies and to the rating services. The major five services are A.M. Best, Duff & Phelps, Moody's, Standard & Poor's, and Weiss. Usually you can find their rating guides at a local library or posted online (www.ambest.com, www.fitchratings.com, www.standardandpoors.com, www.weissratings.com and www.moodys.com/insurance).
Not all of these services cover all types of insurance or rank all carriers. Also, each has a different rating system, so check out how each service works. An "A" at one service may not be equivalent to an "A" at another service.
Equally important is to periodically check the rating of your insurance companies. Healthy companies can become unhealthy. Some observers criticize rating services for not always downgrading troubled carriers as quickly as they should, but certainly if you see your insurance company being downgraded, it should warrant immediate investigation. And there have been numerous cases where bankrupt carriers had been downgraded in the years shortly before going under.
Before switching out of a troubled carrier, however, check with your financial advisor. Not all downgrades are so serious that they require changing carriers, and changing carriers can cause complications. In the case of annuities, for example, you might face significant surrender fees if you change carriers, or you may not meet underwriting qualifications for a new life or health insurance policy.
If you would like more information or would like to ask a question please contact Frederick Hubler at www.creativecapitalsolutions.net or call 610-560-2003. Frederick Hubler is an award winning financial advisor and is president of Creative Capital Solutions, a private financial planning company in Chester County specializing in helping clients acquire, protect and transfer wealth. Securities offered through Capital Analysts Incorporated Member NASD; SIPC.