A. M. Best Revamps Ratings System of Insurers : * Agency: Under fire for some of its analyses, the firm’s assessments will now take policyholder confidence into account.

Sharply criticized for having been slow to warn consumers about several big insurance company failures, A. M. Best Co. announced Friday an overhaul of its rating system to measure a firm’s susceptibility to policyholder runs.

Best said that in the future, its analyses of insurers will incorporate “a policyholder confidence factor that measures the ‘run-on-the-bank’ potential” for the firms it rates.

Best, the oldest and best known of the insurance company rating agencies, issues ratings of the claims-paying ability of insurers that are relied upon by shoppers, policyholders, insurance agents, investors and others.

The firm received its most recent black eye last month for maintaining a top A-plus rating on Mutual Benefit Life Insurance Co. until less than two weeks before the company was taken over by New Jersey insurance regulators. The company’s seizure followed publicity about its troubles and a rash of policy cash-ins by customers.

“I am sure they are responding to their goofs,” said Morris Mendelson, professor of finance at the University of Pennsylvania’s Wharton School.

But Best Senior Vice President Paul Wish said the new rating system “is a response to a brand new environment.”

In this milieu--marked by recession, depressed real estate markets, lower consumer confidence in financial institutions and legal pressures on pension fund managers--”a solvent company’s liquidity problems, which in the past were manageable, can develop into a liquidity crisis,” the company said.

Best said it will evaluate the potential impact of demand-deposit type products, such as annuities and guaranteed investment contracts, on an insurer’s financial stability. Such investments are less stable than traditional life insurance policies because they can be yanked out of a company with little or no penalty or notice.

Moody’s Investors Services Inc. and Standard & Poor’s Corp., two other big rating agencies, said they already evaluate policyholder confidence in assigning ratings, but will add emphasis to that factor.

Mark Puccia, S&P;’s senior vice president in charge of life and health insurance company ratings, said analyses of insurers’ ability to withstand runs include closer examinations of both a company’s assets and its liabilities.

“On the asset side, you’re looking for cash, short-term securities, easily liquifiable assets,” he explained. “On the liability side, you want to see what policies are surrenderable, and what aren’t.”

In the end, he added, “if the public decides to get panicky, there’s no financial institution--no insurance company, no bank, no savings and loan--that can withstand a sustained run.”

Mendelson of the Wharton School applauded the new rating system but cautioned: “There is always the possibility that saying an insurance company is particularly vulnerable to a panic may bring on a panic.”