What’s a Policyholder to Do if an Insurer Becomes Insolvent? Is There Relief?

The financial problems of First Executive Corp. have unnerved policyholders of the company’s life insurance subsidiary, Executive Life. Stanley J. Kooi of Sherman Oaks is among them.

Kooi wants answers about what steps he as a policyholder can take if the underwriter becomes insolvent, and what sort of treatment or relief he can expect from regulators.

First Executive has not been deemed insolvent and the company continues to maintain that its financial condition is strong, although a major insurance rating agency on Friday lowered its rating on the firm to “excellent” from “superior.” A number of policyholders are skeptical of its financial condition, and are surrendering their policies.

Here are some answers to Kooi’s and others’ questions on their life insurance policies:

QUESTION: What recourse do I have if the insurance company that issued my life insurance or annuity policy defaults and can’t honor its obligations?

ANSWER: Not much, if you live in California and the insurance company is actually declared insolvent. In this dire instance, you must line up along with other creditors and wait for the company’s assets to be sold off and proceeds distributed among the creditors. This process could take years, and you may get back only 50 cents on the dollar, or less.

However, insurance experts agree that it is unlikely that financial problems at a life insurance company would actually lead to a declaration of insolvency. More likely, they say, is some sort of merger between the unhealthy institution and a stronger life insurer.

Unlike property and casualty or even health insurance policies, which are subject to the vagaries of unexpected calamities, life insurance is fairly predictable and stable, experts say. Actuarial tables developed over the years can fairly accurately determine life expectancies, and absent a massive plague or disaster, these statistics hold true. So regulators have little difficulty arranging a transfer of policies and coverage.

Still, this is not to say that every insolvent life insurance company can be rescued through a merger.

Q: Then is there any sort of government insurance fund for insurance policies and annuities as there is for bank and savings and loan deposits?

A: Not in California. The state, along with just five others, has resisted creating a health and life insurance guarantee association, similar to a Federal Deposit Insurance Corp., that would make good on the claims and policies issued by insolvent underwriters up to certain limits. (The state does, however, have a guarantee association for auto insurance and workers’ compensation claims.)

The state insurance commissioner’s office says that despite repeated attempts, it has been unable to work out an agreement to create a health and life insurance guarantee association with the insurance industry, because of an ongoing dispute over how the association should be funded. The industry has said that any funds it provides for the association should be deducted from the taxes it must pay to the state. However, a state constitutional amendment to establish a guarantee fund, placed on the ballot by the Legislature several years ago, was not approved by the voters.

This left California, along with Alaska, Colorado, Louisiana, New Jersey and Wyoming, as the states without associations.

One important thing to keep in mind is that these associations are not nationwide and not an adjunct of the federal government, like the FDIC. These associations guarantee policies issued only by insurance companies headquartered in a particular state. And, by far the majority of the associations only offer coverage to residents of their own states. So, although Connecticut, home of many insurance companies, has a guarantee association, it applies only to Connecticut residents.

Q: Is there anything I can do now to protect myself?

A: That depends on several factors, including your health, age and type of insurance you now hold.

If you try to cash out your annuity or take your health or life insurance business elsewhere, you might face substantial financial penalties. But perhaps a more serious obstacle is the question of whether you can still qualify for similar terms for your health and life insurance needs. Premiums and coverage are determined largely by your health and age. If these have changed since you originally bought your policy from the troubled underwriter, you could face huge premiums or, worse yet, the prospects of being unable to find any insurance.

But, if you think that you can get another life insurance policy easily, and you have only a term life policy that provides just for benefits upon death, you might want to find a new underwriter. Typically these policies are renewed annually so you would not lose much.

However, this is not true with annuities or the whole life, universal life or other types of insurance policies that offer a savings feature as well as death benefits. Joseph A. Mintz, who publishes an insurance newsletter in Dallas for financial planners, says holders of annuities and life insurance policies with a cash value should not switch to a new policy at another institution without consulting a financial planner or other professional.

Q: Is there any way I can check on the financial strength of an insurance firm?

A: Absolutely. There are several sources. Perhaps the best known is A.M. Best Co., the leading insurance company rating service, which evaluates about 1,500 insurers in its “Best’s Insurance Reports, Life-Health Edition.” The guide can be found in most larger public libraries.

Best assigns companies one of nine ratings, ranging from A-plus for the financially strongest to C-minus for the weakest. Some experts, such as Joseph M. Belth, an insurance professor at the University of Indiana, recommend that consumers buy only from companies with an A-plus rating, preferably for the last 10 straight years.

However, these ratings are not foolproof. Some companies provide faulty or fraudulent financial information. Further, Best’s analysts can draw the wrong conclusions from data they are given. Libraries can also offer outdated information, carrying only the annual editions of the guide rather than quarterly updates.