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Check the Financial Health of Your Insurance Company

Karen Haywood Queen / October 7th, 2013

When you buy a car or a washing machine, you quickly find out whether it's reliable. Not so with insurance. Your insurance policy may sit for years before you need it. "Insurance is all based on a promise," says Stephen Johnson, deputy insurance commissioner for corporate and financial regulation at the Pennsylvania Insurance Department in Harrisburg. "You don't get a product when you leave the store. You get a promise that, when you need the company for a claim, they'll be there." Even though insurance is a large purchase, most consumers don't consider the financial health of insurers they're considering, says Robin Smith Westcott, Florida's Department of Financial Services insurance consumer advocate in Tallahassee. "People will do that kind of research when they're purchasing a car," Westcott says. "They'll google it and check every Internet site. We traditionally have not been insurance consumers. We have a relationship with our insurance agents and have depended on them to do the research for us." Ideally, your insurance agent will do that detective work for you—that's the agent's responsibility, says Bernd Heinze, executive director of the American Association of Managing General Agents in King of Prussia, Pa. But you may be bypassing an agent and buying insurance directly. Or you may want to check for yourself anyway. "As Ronald Reagan said, 'Trust, yet verify,' " says Tina Bukow, assistant vice president of business development at ratings agency A.M. Best Co. in Oldwick, N.J. "Over the years, consumers have gotten more savvy. More of them check, but I don't think it's 50%. They should. It's an easy thing to check and it's a smart thing to do." Fortunately, there are a number of ways you can, for free, check an insurance company's financial health.

Ratings agencies grade insurance companies

A.M. Best, founded in 1899, is widely regarded as the industry leader because it rates only insurance companies, say Johnson and Heinze. Plus, "Some of the other ratings agencies look more at the strength of an insurance company from the stockholders' perspective," Westcott says. "A.M. Best looks at it more from the consumer's perspective."
Even though insurance is a large purchase, most consumers don't consider the financial health of insurers they're considering.
Although you have to pay to get a company's full report, you can get three company's ratings for free by calling A.M. Best at 908-439-2200, ext. 5742. Or visit the A.M. Best website. Other ratings agencies include: Each ratings agency has distinctions. For example, Demotech is more likely to rate smaller companies. Fitch doesn't limit itself to voluntary ratings, but also publishes what it calls unsolicited ratings, according to company spokesman Brian D. Bertsch. Weiss also publishes independent, unsolicited ratings, Vice President Pookie Skoran says. Moody's bases its ratings on its opinion of the company's ability to repay policyholder claims, says Paul A. Miller, special deputy receiver and CEO in the Illinois Office of the Special Deputy Receiver in Chicago. Many insurance companies also post their rating on their own websites. "When they have a rating they're proud of it," Bukow says. For example, we checked State Farm's auto insurance division both at A.M. Best and at the State Farm website and found the division has an A++ rating from A.M. Best and an AA rating from Standard & Poor's.
There are a number of ways you can, for free, check an insurance company's financial health.
The ratings agencies get their information from the company's quarterly and annual financial filings, from Federal Trade Commission filings, from the companies themselves, from filings to the National Association of Insurance Commissioners (NAIC), and responses to queries, Westcott says. Check the ratings every year, or more often, to make sure the company remains financially healthy, Miller says. "We have seen companies drop from an A rating to a C rating in a relatively short period of time," he says. In fact, the Magnolia Insurance Company in Florida was rated an A right up until the state placed it into receivership for liquidation in 2010, Westcott says.

Cause for concern

But just because a company's rating or grade has dropped doesn't necessarily mean you should start shopping for a new insurance policy. "A downgrade is always a cause for concern, but sometimes a downgrade may not be the company's fault," Bukow says. "In 2008, companies lost a lot of investments and that could cause a drop from an A minus to a B double plus. A B double plus isn't a bad rating. That may have happened to a lot of companies because of the market event." If the company was downgraded because of poor management, the departure of the entire senior management team, a huge drop in the surplus, losses without reserves to cover them, or unpaid major claims, then any one of those things would be cause for concern, Bukow adds.

Other sources of financial info

In addition to the ratings agencies, other places to check the health of your insurer include the NAIC website. You also can check via your state's department or bureau of insurance. "Most states have very user-friendly websites and can direct you to consumer hotlines," Miller says.
But just because a company's rating or grade has dropped doesn't necessarily mean you should start shopping for a new insurance policy.

State guaranty funds protect consumers when companies fail

If your insurance company gets into financial trouble or is at risk for trouble, your state's insurance department first will offer guidance and close supervision in an attempt to avoid failure. If the company fails, your state's insurance guaranty association will protect you, Westcott says. The exact amount varies by state and type of insurance, but it's usually $300,000 to $500,000, Westcott says. If you have a claim at the time of failure for more than the protected amount, "you may not get the full claim paid." One potential loss is the annual premium you have paid, but most state guaranty funds are able to get that money back to consumers, she adds.

Ratings now more reliable

Overall, ratings are more reliable than in the past. Insurance company failures in the 1990s and the crash of 2008 have spurred ratings agencies to consider additional factors in ranking insurance companies as part of a process called enterprise risk management, Heinze says. Those other factors include an insurer's surplus and reserves, where the company is writing policies (for example, lots of earthquake policies in an earthquake-prone region), and stability of the leadership team. A.M. Best always has included a form of enterprise-risk management, according to Bukow, although the process did not have a formal name until recent years. "Since hurricanes Katrina and Sandy, we include more stringent stress testing of a company's balance sheet when it comes to catastrophes," Bukow says. "Since the financial crisis of 2008, we include more stringent testing of investment portfolios." Others agree with the assessment that things are improving. "I am optimistic that the system has gotten better," Miller says. "We've seen regulatory improvement on both the state and federal levels."

Guide to understanding A.M. Best's financial strength ratings

Secure A++ and A+ (superior) A and A- (excellent) B++ and B+ (good) Vulnerable B and B- (fair) C++ and C+ (marginal) C and C- (weak) D (poor) E (under regulatory supervision) F (in liquidation) S (suspended) Modifiers include U—under review. The rating may change within six months based on events.


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