We all depend on insurance, from health coverage, life insurance, protection for our house and car, to our annuity in retirement. Every facet of our lives involves insurance, and we pay a large amount to make sure we will receive help when we need it.
How can you be sure your insurer is able to meet its claims? If you live in Texas and were affected by Hurricane Ike, aside from the desperate worry over the damage to your property, the news last week about AIG will not have helped.
There are two positive things about insurers. First, they are strictly regulated to ensure companies maintain the ability to meet claims, and this regulation is overseen by state insurance commissioners. Second, in the event an insurer is unable to meet its claims, states have a guaranty arrangement where all insurers would be required to contribute funds. When there is a multi-state life and health-company failure, the National Organization of Life and Health Insurance Guaranty Associations, or NOLHGA, coordinates claims. Similar guaranty associations exist for all insurance types.
So what is different about an insurance company that provides additional comfort? After all, banks are regulated by the FDIC and they fail, and AIG has failed too?
It is important to realize that AIG's insurance companies are continuing to operate as normal. The insurance companies did not fail; the problems are with the holding company. The insurance companies are considered by the National Association of Insurance Commissioners, or NAIC, to have sufficient liquidity to meet all claims. In fact, the NAIC has set up a special committee of commissioners overseeing AIG to ensure normal operations. Additionally, the NAIC will oversee any sale of an insurance company.
"It will likely be the insurance subsidiaries or their valuable blocks of business and high-quality assets that will be sold in an attempt to return the AIG parent company to a more stable financial position," NAIC President and Kansas Insurance Commissioner Sandy Praeger said.
The NAIC outlines the regulatory position as operating under conservative accounting rules and mandatory annual CPA audits. Insurers must follow investment regulations and limitations, and there are minimum capital surplus requirements. From a risk perspective, state insurance regulations give insurers the ability to continue to operate normally with greater losses than other parts of the financial sector in down-market cycles. State regulators also perform ongoing financial analysis of insurers and on-site examinations.
According to the NAIC, the entire solvency framework and safety net for policyholders is uniform in every state as evaluated by its Financial Regulation and Accreditation Program. Rating downgrades and drops in share prices do not change an insurer's ability to pay claims. Ratings issued by TheStreet.com are intended to provide exactly that comfort with the financial-strength rating of the insurance company representing the ability to meet a policyholder's claim considering various indicators covering capital, reserves, profitability, investments, liquidity and stability.
If an insurance commissioner believes an insurance company is at risk, steps can be taken to protect policyholders. A company can be placed under supervision, a step intended to monitor the company and give it specific targets to meet before the company can continue to operate without oversight. An alternative, in the event of imminent failure, would be to seek a court order to place the company under the control of the commissioner, in which case a manager would normally be appointed to run the company.
There are strict financial guidelines in place to provide policyholders the comfort that insurance companies are acting prudently, state regulators are monitoring the companies to make sure that insurers follow the regulations, and there are actions that a regulator can take to protect the policyholder.
During a disaster like a hurricane, the guaranty funds can kick in if a company fails. NOLHGA President Peter Gallanis said the group has acted in over 60 multi-state insolvencies over the past 25 years, assessing over $4.4 billion on its members to meet policyholder claims. "Current assessments are averaging $25 million per year, a relatively low level considering that we have the capacity for $8 billion," he said. Policyholders have a preferred status over general creditors, he said.
TheStreet.com Ratings issues financial strength ratings for 4,000 life, health, annuity, and property/casualty insurers. They are available on the Insurers & HMOs Screener. In addition, the Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available at no charge on the Banks & Thrifts Screener.