NEW YORK -- Given that the role of insurance is to be around when all else fails, the problems facing these companies are causing concern among policyholders.
Three major life insurers have collapsed in the past three months, and the ratings of six other major insurers were downgraded Friday by Moody's Investors Service, a rating agency.
Standard & Poor's Corp. and Weiss Research, also rating agencies, say their operators have been deluged with thousands of telephone calls recently from distraught policyholders wondering if their policies are endangered.
The answer is a qualified no. Historically, the $1.4 trillion life insurance industry has been superb in honoring obligations. Until April, the only major postwar failure of a large insurance company was that of a subsidiary of Baldwin United in 1983. And annuity holders eventually received payments -- albeit four years late and at a lower interest rate.
"Our ratings suggest that further defaults would not be the case," said Chester Murray, an associate director at Moody's. "But it's hard to forecast events. Ratings are dynamic, and there could be further change."
Similarly, William O'Neill of Standard & Poor's said that "it's possible but unlikely" some companies will not cover claims.
Complicating the outlook for insurers is that they now have two ways to go bust: the traditional way, through bad investments, and a newer development -- a run by panicky policyholders. Because many life insurance and annuity products are 20- to 30-year investments, most insurance companies sink at least some of their money into extremely long-term investments like real estate. Therefore, the companies are vulnerable to a run, even if they are fundamentally solvent.
The prospect of a run wasn't an issue until three months ago, when California took control of Executive Life, prompting widespread distress among policyholders that has yet to be fully resolved.
That, said Joseph Belth, a professor of insurance at Indiana University, was a watershed. It was followed by runs and subsequent state takeovers of insurance subsidiaries of California-based First Capital Holdings and, last week, of Mutual Benefit Life Insurance Co. of Newark, N.J.
"In the case of Executive Life, there was a constant deluge of bad news for 15 months before the company was finally taken over," Mr. Belth said. "Once that happened, it changed the parameters. Now, people realize it [failure] is possible, and they are more sensitive to bad news.
"We are in a new and dangerous era," he said. "First Capital was the first victim. The bad news would not have caused a run were it not for the heightened sensitivity stemming from First Executive. Mutual Benefit is another in the same wave."
Spokesmen at several of the companies downgraded Friday by Moody's, including Travelers, John Hancock and Mutual Life of New York, said redemptions yesterday were minimal and inquiries no more than usual. All retain claims paying ratings of at least "adequate."
"At this point, it's a non-event," said Bill Boyan, chief financial officer of John Hancock Mutual Life Insurance Co.
"There is very little impact," added Charles Wasilewski, spokesman for Mutual of New York.
For concerned policyholders, both Moody's and Standard & Poor's give out free telephone ratings. Weiss Research, in West Palm Beach, Fla., also provides ratings both over the phone and more extensively in writing for a fee.