New York--When the troubled Executive Life Insurance Co. toppled recently, you got your first look at what such a disaster means to policyholders. Their insurance-based savings have all been frozen. They cannot cash out their policies or borrow against them. Years may pass before they finally get full access to their money.
For now, at least, the company will continue paying all life, health and annuity claims. Eventually, however, these policies will probably be restructured. Customers may get lower benefits or less cash than they'd counted on.
What forced the hand of insurance regulators was the massive run on Executive Life policies by customers trying to get their money out. The question is whether this collapse will set off runs on some of the other low-rated insurance companies. I'd answer that question "probably yes." If your insurer isn't top-flight, and you're able to quit without paying sizable penalties, you should certainly think about doing so.
How do you get a reading on your company's solvency? For years, you consulted only A. M. Best. Highest rating: A+, followed by Contingent A+, then A and Contingent A.
Recently, however, three other major firms entered the field -- Standard & Poor's and Duff & Phelps (both of whose four top ratings are AAA, AA+, AA and AA-), and Moody's (top ratings: Aaa, Aa1, Aa2, Aa3).
Unfortunately, this alphabet soup can confuse the unwary. You don't know what a letter grade means without understanding the ranking system.
For example, take Bankers Security Life Insurance Society in New York. It's rated A+ by Standard & Poor's. Had that A+ been from Best's, you'd have a top-drawer company. But at S&P, A+ is the fifth ranking down.
And take Great Southern Life Insurance Co. in Texas, rated A by both Best and S&P. By Best, that makes Great Southern a third-ranked insurer, but by S&P, it's six rungs down. To compare a company's rankings across all the services is eye-opening. Some insurers that get kisses from Best get kicks from the others.
Mutual Life Insurance Company of New York, for example, takes first place with Best (A+), fourth place with S&P (AA-) and sixth place with Moody's (A2). In general, Moody's is the toughest marker of the group and A. M. Best the most forgiving.
Joseph Belth, professor of insurance at Indiana University, has just published a comparison of how each service treats the 156 life-health insurers that are covered both by Best and at least one other company. Of 90 insurers rated A+ by A. M. Best, only 35 got top ratings from the other services, too.
Of all the companies on Belth's list, 76 got lower ratings from one or more of the other services than from Best -- suggesting, perhaps, that Best isn't looking quite hard enough.
To get a copy of this list, send $5 for the April, 1991, issue of the Insurance Forum, P.O. Box 245, Ellettsville, Ind. 47429.
Many consumers can't get a rating on their insurer at all. A.M. Best gives letter grades only to 2,222 of the estimated 5,000 to 6,000 active companies. Best's competitors have rated only those companies that asked for it and opened their books.
But since April 15, Standard & Poor's -- which now rates some 400 companies -- started giving "qualified solvency" ratings to at least 1,600 more. The new ratings will be based on data the insurers file with the National Association of Insurance Commissioners and will be published whether the company wants it or not.
So ask your insurance agent about it. Companies that look sound will be rated BBBq (above average); those in the middle, BBq (average) and the weaklings, Bq (below average).
"What surprised us [about the new ratings] is that a significant number of companies look shaky," Steven Dreyer, S&P vice president, says.
The lion's share of insolvencies are among smaller companies. "But you will see some very small companies with top ratings and some large ones with low ratings," he says.
For the full list of S&P's regular and qualified ratings (of special interest to insurance agents and financial planners), send $75 for the life-health companies or $75 for property-casualty companies, to Standard & Poor's, Insurance Rating Services, New York, N.Y. 10004.