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How to Measure Your Life Insurer's Health

For peace of mind, it's important to track your insurance provider's financial vital signs.

With some luck, it will be a long time between the day you purchase life insurance and the day it pays out to your beneficiaries. In the meantime, life insurance offers another benefit: the peace of mind that your loved ones will be taken care of after you're gone.

But that peace of mind depends on the condition of the company providing your life insurance. Having said this, you may be asking yourself:

What are the key elements to look for in determining the heath of your life insurance company?

In order to answer this question, we first need to understand the critical elements of a life insurance company. These include surplus adequacy, asset quality and diversification, liquidity, earnings and profitability. These financial measures are all key in determining an insurance company's rating and are good indicators of a company's financial strength.

If you are wondering how to interpret these measures, here's a brief explanation about what they can tell you:


Surplus is the difference between the provider's total assets and liabilities. This can provide for adverse experience in mortality, morbidity, investments and other pricing factors.

When looking at surplus, it's important to keep in mind the company's size. A larger company might have more surplus than a smaller one, but it also might invest in riskier assets than a small company maintaining a more conservative blend of investment instruments.

An insurer's surplus adequacy can be measured by its capital ratio. This is determined by taking an insurer's surplus funds, capital stock and asset valuation reserve, or AVR, as a percentage of its general account assets. In most cases, the higher the capital ratio, the better a company is expected to withstand adverse investment and mortality experience.

Asset Quality and Diversification

Insurer portfolios are made up of low- and high-risk assets. One of the biggest challenges faced by insurance companies -- and by most investors -- is maintaining a safe and conservative blend of investments while aiming for the highest returns possible. High-risk assets include junk bonds, common stock, equity-type investments, problem mortgages and real estate.


Liquidity refers to the insurer's ability to market investments and meet potential surrender demands that may be conservative or extreme. Good liquidity is important to assure policyholders and avoid mass contract surrenders, which can hurt a life insurance company.

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Earnings and Profitability

Earnings and profits are measures commonly used to assess the stability of a company. Ratios of total earnings to premium, revenues and assets can give a good indication of sudden shifts that may need more attention or can simply confirm strong, steady growth over time.

Earnings for insurers come from two sources: premiums and investment income. Too much volatility in either of these will hurt the stability factor in a company's rating.

Information about a provider's assets, liabilities, insurance in force, levels of premium and mortality experience is very useful, but there's more you need to know to establish an adequate appraisal of its financial integrity.

The financial rating of an insurance company takes into account all of this and much more, which is why a significant amount of reliance is placed on these evaluations. Detailed reports about the financial ratings of all life insurance companies reporting to the National Association of Insurance Commissioners are available at Ratings Web site


This report gives more detail about the viability of an insurance company, which bases its rating on five factors: capitalization, investment safety, profitability, liquidity and stability.

These are complex computations that measure critical safety elements and can give a good indication about the financial vulnerability of a company.

The report not only determines a company's current claim-paying ability and how it would withstand mild economic adversity but also covers the company's ability to deal with severe economic adversity and a sharp increase in claims.

Below is a list of the top 10 life insurance companies as of the end of 2006, as rated by Ratings.

Melanie Dufour joined TSC Ratings as a life and health insurance analyst in February 2007. She has an actuarial background with a BS degree in Actuarial Mathematics and Finance from Concordia University in Montreal, QC. Melanie has most recently worked as an actuarial analyst with Aequicap Insurance Company in Ft. Lauderdale, FL and prior to that as a senior analyst with Watson Wyatt Worldwide in Montreal, QC.