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How Solid is Your Insurance Company?

Amid bankruptcy filings by Lehman Brothers, the take over of Merrill Lynch by Bank of America and concerns that American insurer American International Group Inc. (AIG) is seeking a cash infusion of up to $40 billion, consumers have to wonder which insurance [1] or financial service company is next to announce financial woes!

Should Americans be concerned about their home, auto and life insurance policies, given the current economic climate? Which major insurer or investment banking firm will be in the news next?

Perhaps it’s worth looking at the state of America’s Insurance Industry a little closer …

What’s to Worry?

Insurance companies amass gargantuan pools of money, much of which is invested in real estate loans. And while pension funds, annuities and insurance claims may not be at risk because of subprime loans that are the cause of some of this week’s bad news in the financial services sector, some insurers’ portfolios may contain some bad loans.

Government regulations and oversight are stringent in the insurance investment arena but you know how those things go! Freddie Mac and Ginny Mae are great examples, as was the Savings & Loan debacle of the late eighties and early nineties.
So, yes, you should keep tabs on how your insurance company is doing, whether you are a shareholder, policy holder or both! Remember no matter how bad it gets not ALL financial institutions will suffer the drastic measures Lehman and Merrill Lynch are going through currently.

Does your insurer have you covered?

Insurance Industry Safeguards

Fortunately, the government has put safeguards in place to intervene in case of insolvency, which is when an insurance company is essentially broke; they are not eligible under federal law to file for bankruptcy the way a normal corporation can.

Insurance guaranty associations are run by each state to act as a safety net, but usually they have claims ‘caps’ per claim and notoriously take a long time to pay the claims since the state government runs these associations and these departments are often over burdened.

But at least you know somebody will step in if your insurance company goes belly up. Still, better to research a little and increase your chances of not having to test government safeguards by picking a solid insurer!

Insurance Company Ratings

The bottom line is to pick an insurance company that has a strong financial rating so the claims process works effectively. Ratings systems such as Moody’s, A.M. Best and Weiss Research in the insurance industry work somewhat like report cards. Ratings A through F are typical, often using plus or minus to further qualify grades, as well as the use of multiple letters, such as AA or AAA- to specify the financial strength of each insurer.

Sure, it takes time to research insurance companies, but you can sleep well at night knowing you are paying fair premiums and that when you need to file a claim you can reasonably assume you’ll be compensated fairly.

Finding the Right Insurer

Contact your state insurance commissioner’s office to verify financial details about your insurance company. If you aren’t satisfied with what you learn, shop around and consider switching to a company you feel more confident doing business with.

When considering an insurance company, many people rely heavily on the insurance agent; we all want to do business with someone we can trust, right? But consider this; disruptive technology has reduced the cost of buying stocks, mutual funds and insurance services significantly over the last 10 years.

While the majority of us still buy insurance the ‘good old boy’ way, smart shoppers have begun to convert because it’s just too good a deal to pass up. This has put pressure on firms with the higher cost structure of traditional insurance sales commission programs; agents can earn up to 50% of your premium year in and year out if you stay with them!

Nothing wrong with that, but don’t you imagine that company would have to charge a higher premium than one that sells primarily online and pays little or no sales commission?

Don’t Base Your Decision on Price Alone

Value is never a function of price alone; if you get rock bottom insurance premiums but the service is horrible and you worry whether you’ll be fully reimbursed for an insurable loss, then you aren’t getting a good deal, regardless how cheap the rates!

And what if your insurance company suddenly said “Sorry, we aren’t able to pay your claim”? For what reason would they reject it you immediately want to know. But, the truth is it doesn’t really matter. When you are the one being rejected you’ll wonder whether the same thing would be happening had you gone with a better insurance company.

So you have to weigh the value equation when choosing an insurer. If you’re comfortable deciding what level of coverage and policy benefits you need you can save a bundle by telling your college-buddy-turned-insurance-agent thanks, but no thanks.

On the other hand, if you like having a local financial services person to do business with, the premium you pay on your premiums (sorry for the bad pun) may be more than worthwhile. It’s a very subjective and personal decision, much like the question of whether to go with a full service brokerage or buy stocks using an online discount stock brokerage.