Your Best Protection Is to Find a Strong Insurer

Mounting woes among the nation’s life insurers have triggered concerns about whether the industry might become the next big financial crisis. The industry insists that it will avoid a debacle on the scale of the savings and loan mess, but it’s nonetheless prudent that you check the financial strength of your insurer before investing.

The problem in a nutshell is that many insurers--seeking to offer high returns in their insurance, annuity and other products--invested during the 1980s in riskier assets, including commercial real estate and high-yield junk bonds.

Accordingly, there is a “significant risk” that a severe economic downturn or decline in major investment markets could result in the insolvency of one-fifth of the nation’s major life insurers, according to a recent report by IDS Financial Services, a unit of American Express, which owns a life insurance company.

Signs of troubles are mounting. Failures of life insurers--mostly smaller firms--are increasing, and industry-administered guaranty funds have been paying out enormous amounts to policyholders and others in insolvent firms. Some experts fear that a collapse of one giant insurer could trigger a domino effect among others.

What does this mean to you as a current or potential policyholder?

No one knows for sure what could happen because a big insurer has never collapsed. But if insurers become insolvent or go under, you or your beneficiaries could lose your death benefits, annuity payments or cash buildup in your policies. Or, more likely, you or your beneficiaries may be forced to wait months or years before getting that money, says Glenn S. Daily, an independent insurance consultant in New York. Holders of annuities in now-defunct Baldwin-United, for example, had to wait years before getting their money.

California recently joined a number of states with laws creating so-called guaranty funds designed to protect policyholders in cases of insolvency. That would be similar to how the Federal Deposit Insurance Corp. protects savers in the event of bank or S&L; failures.

California’s fund (which is actually called a guaranty association) will become effective next January and will protect eligible consumers for up to $250,000 in death benefits and $100,000 in cash value, says Mark Rakich, legislative counsel for the state Department of Insurance.

But California’s program is more restrictive than those of many other states, limiting even further how much it will actually cover, Rakich notes.

California’s plan and other programs carry many other limitations as well, says Joseph M. Belth, professor of insurance at Indiana University and a leading expert on life insurers. For example, they generally provide only for the collection of assessments from insurance companies after an insolvency, Belth says. Also, they may not pay residents outside their states, so that if you hold a policy from an out-of-state insurer that fails, you may not get anything. And they don’t have federal backing like the FDIC.

“The real question is what would happen if there’s an insolvency of a major company,” Belth says. “If that happens, it’s not clear if the arrangements would work. It’s possible that the assessments would be so large as to bring down other companies.”

Thus, the best protection is to make sure you do business with financially strong insurers.

The simplest way to do that is by checking the ratings of insurers by the four major rating agencies: A. M. Best, Standard & Poor’s, Moody’s Investors Service and Duff & Phelps.

Many major public libraries carry A. M. Best’s guide, “Best’s Insurance Reports, Life-Health Edition,” containing its ratings and reports on insurance firms.

Reports from the other rating agencies also may be available at libraries with extensive business-reference collections (you could get them directly from the rating agencies, but that tends to be expensive and is not generally advisable for the average consumer). You may have better luck getting this information from your insurance agent.

But ratings are not foolproof. And it’s also possible that your policy may have been transferred to another insurer, so that your original due diligence has become moot.

Nonetheless, experts say, it’s still worth checking the ratings. If you are most conservative, stick with only those insurers with the top ratings. For A. M. Best, the top rating is A+; at Standard & Poor’s, it’s AAA; Moody’s, Aaa, and Duff & Phelps, AAA.

Belth notes that about 270 life insurers enjoy Best’s A+ rating. About 190 have carried the A+ rating for 10 straight years, he says. To get a list of those, plus other information on insurance ratings, send $10 to Insurance Forum, P.O. Box 245, Ellettsville, Ind. 47429. Ask for the September, 1990, issue of Insurance Forum.

What if you already have a policy with a firm with financial woes? That has been the dilemma facing policyholders of Executive Life Insurance Co., the life insurance unit of Los Angeles-based First Executive Corp. News about the firm’s ailing junk bond portfolio have caused many customers to terminate their policies, incurring surrender charges in the process.

If you have a term life policy (one that provides for only a death benefit, without a savings or cash-value component), you can switch to another insurer when it’s time to renew the policy after you’ve had it for a year.

But the decision is tougher if you have a cash-value policy, annuity or other long-term product. Then the decision can depend on a number of factors, including the financial strength of the insurer, the surrender charges and your state of health. Replacing the policy might be in order if the cost of new insurance will be lower than your current policy and you can make the switch easily and cheaply.

Because the decision can be difficult, Belth suggests consulting with a trusted and knowledgeable insurance adviser (not necessarily your agent).