Insurance is a very special industry. Its whole value is a very simple promise: To pay a potentially large benefit in the event of a claim. But this claim may occur many years in the future, sometimes decades after the purchase of the policy. One of the questions you need to ask yourself is, Will the carrier be able to keep this promise? Will they still even be around many years in the future? You really have no way to be sure.
There are many factors that go into the selection of the right insurance carrier. Since this will be a long-term investment, you need to make sure that the one you’re selecting will meet all of your needs. Whichever carrier you choose, you should review the company’s pricing, explore it’s policy offerings and read all the consumer ratings. It is also very important to research the company’s financial health.
Please remember that insurers are actually investors; all money they collect for premiums are reinvested so they have the ability to pay out on policies sold, show a profit and pay dividends to its shareholders. Remember, you purchased this policy in order to take care of your family after your death, therefore you must feel secure it will be there when you need it.
The insurance industry is extremely regulated, all major life insurance companies have financial strength ratings. There are multiple agencies that access the financial stability of them.
- AM Best: A credit-rating organization specific for the insurance industry. It provides information about credit worthiness of insurance companies in the United States, Canada and the United Kingdom.
- Fitch: One of the “Big Three” nationally recognized statistical rating organizations by the SEC. Unlike AM Best, this organization focuses on all businesses, not just insurance. Even though it’s the smallest of the three, it is used as a tie-breaker when there are conflicts between Moody’s and the S&P.
- Moody’s: Is a bond credit rating service and is the go-to resource for identifying a company’s credit worthiness.
- Standard and Poor’s: It provides financial strength ratings of businesses and provides analysis of stocks and bonds. It remains a very good source of credit reporting for companies and corporations.
Each of them has their own grading system and will assign a letter grade reflecting the strength and stability of each rated insurance carrier. Each of the rating agencies use different criteria in assessing the strength of a carrier and may have different ratings for the them. By comparing, you will get a pretty good idea on the carrier’s financial health. Because AM Best is the only organization that focuses solely on the strengths of insurance companies, it is usually the most useful resource used when assessing a company.
When assessing the strength of an insurance company, these agencies look at a variety of metrics such as:
- The future liabilities of a company and when they come due
- The cash flow generated from premiums
- The stability and liquidity of the company’s reserves
- The quality of their underwriting
- Is their roster of client’s substantially higher risk than normal
- The amount of reinsurance in place
They basically look at anything that may have an impact on the company’s ability to stay solvent in time of crisis. There is no guarantee available on insurance products or any federal agency to back them if they get into trouble. But each state has a guaranty association that will provide relief to protect policyholders in life and health companies, up to a certain limit. You can gather all the information on these guaranty funds and limits by contacting your state’s insurance commissioner.