Insurance is supposed to guarantee you and your family protection. But what happens if the insurer goes belly-up? And what can you do to protect yourself in such a situation?
What Are the Odds of an Insurer Becoming Insolvent?
Before we scare you off, the odds of your insurer entering impairment or insolvency are very low. In 2018 there were 5,965 domestic insurance companies in the United States and its territories, according to the National Association of Insurance Commissioners. Of these, 2,507 were in property & casualty insurance, 931 in health, 841 life & annuities, and 1,686 other forms of insurance.
Since 2008, when the great financial crisis began, an average 1.7 life and health insurance companies have gone into impairment or insolvency each year. So far in 2019, two insurance companies have gone into receivership: Northwestern National Insurance Company of Milwaukee Wisconsin; and Senior American Insurance Company, Pennsylvania. These figures are from the National Organization of Life & Health Insurance Guaranty Associations, which usually becomes involved when policyholders in more than three states are affected by an impairment or insolvency.
What Happens If an Insurer Can’t Pay?
When you open a savings account with a FDIC-member bank, your first $250,000 is protected. Similarly, when you purchase insurance, you are protected – but only to a certain extent.
Each state, along with the District of Columbia and Puerto Rico, has a life & health insurance guaranty association and a separate property & casualty guaranty association. All insurers (with limited exceptions) licensed to do business in a state are required to be members of that state’s guaranty association. For example, a life insurance company with a license to do business in 10 states would be a member of 10 state guaranty associations. Under this system, all insurers in a state effectively act as guarantors for policyholders in that state.
In life & health insurance, most states provide guarantees up to the following amounts (with a few exceptions):
- Life insurance death benefits: $300,000
- Cash surrender or withdrawal values for life insurance: $100,000
- Present value of annuity benefits, including net cash surrender/withdrawal values: $250,000
- Major medical or basic hospital, medical and surgical insurance policy benefits: $500,000
- Long-term care insurance policy benefits: $300,000
- Disability insurance policy benefits: $300,000
- Other health insurance benefits: $100,000
How to Check Your Insurer’s Financial Strength Rating
While it’s good to know the state guaranty association has your back, you should still look to purchase your policy from a financially stable insurer. If your insurer becomes insolvent, there are limits to how much your state guaranty fund will cover. Moreover, state guaranty funds typically take more time to pay out than the insurers themselves – and waiting times have been known to reach two to three years.
When shopping for insurance, most consumers compare providers by monthly premium, excess, and perhaps customer service. We recommend also checking the insurer’s financial strength rating–freely available on the websites of 4 major credit rating agencies and a handful of smaller agencies.
- A.M. Best. The only one of the rating agencies dedicated specifically to rating the insurance industry.
- Standard & Poor’s. Also known as S&P, this is one of the two major U.S.-based credit-rating agencies.
- Moody’s. The other major U.S. based-credit-rating agency.
- Fitch. The smallest member of the “big three” rating agencies, Fitch is dual-headquartered in New York and London.
Insurer Financial Strength Ratings
AAA, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–, BB+, BB, BB–, B+, B, B–, CCC+, CCC, CCC–, CC, C
The purpose of a financial strength rating is to evaluate an insurer’s ability to meet its ongoing insurance policy and contract obligations, i.e. its ability to continue honouring claims in the event of unforeseen challenges such as: economic downturn; financial difficulties; or a weather event that increases the number of claims.
When assessing the financial strength of an insurance company, the agencies look at many different criteria, including:
- Cash reserves.
- Future liabilities and due dates.
- Quality of underwriting (i.e. not all high-risk policies).
- Cash-flow generated from premiums.
- Diversity of revenue streams.
- Risk-management procedures.
The biggest insurers have ratings from all four big agencies, but smaller insurers may only be rated by one or two of the agencies–or none at all. Furthermore, the agencies often disagree, so it’s a good idea to check an insurer’s rating from multiple agencies before making a decision.
Here are a few additional tips on using financial strength ratings:
- Insurers tend to highlight the agencies that give them the best ratings. If your insurer says it has a strong rating from one agency, check at least one additional agency for yourself.
- The agencies regularly re-evaluate the insurers and upgrade, downgrade, or re-affirm the insurers ratings in line with the latest findings. Therefore, it’s worth checking your insurer’s score at least once each year.
- Ratings are given for operating companies and not the groups that own them. For example, A.M. Best lists 12 separate State Farm subsidiaries, including State Farm Mutual Automobile Ins Co, State Farm Life Insurance Company, and State Farm Florida Insurance Company.
Find the Right Insurer for You
There are thousands of insurers in the United States, ranging from large, nationwide companies to smaller companies licensed to do business in one or two states. In order to get the best policy, it is crucial to do a comparison shop. When comparing insurance companies, it’s worth looking at a range of factors including premium costs, claims limits, and customer ratings. Whatever you look at during your comparison search, don’t forget to consider financial strength.