An insurer's financial health far outweighs cost of policy


February 09, 2003|By EILEEN AMBROSE

IT'S TEMPTING when buying insurance to go with the lowest premium.

But when buying a life policy, annuity or other product where benefits might not be paid out for decades, it's even more important to make sure the insurer is financially healthy and will be around when you need it.

"The most important factor in selecting an insurer is the financial strength of the company," said Joseph Belth, editor of the Insurance Forum newsletter and professor emeritus of insurance at Indiana University.

For consumers, the best way to check on an insurer's health is to look at its credit rating, an opinion by a rating agency on the insurer's financial strength and ability to pay claims.

Belth said there has been renewed interest recently in credit ratings by consumers and agents because of the weak economy, the December filing for Chapter 11 by insurance giant Conseco Inc. and a bevy of downgrades by rating firms.

Last year, for example, more insurers' ratings were downgraded than upgraded by rating agency A.M. Best. One day in September, Fitch Ratings downgraded 35 life insurers in North America, or 42 percent of those it rates. And Standard & Poor's downgraded 24 U.S. life insurers last year, its highest in a decade, compared with eight in 2001.

Life insurers have been hurt by investments in the stock market and in the bonds of some high-profile failures, such as WorldCom Inc. and Enron Corp., said Manfred Nowacki, group vice president with A.M. Best.

Those selling variable annuities got burned by guarantees made in the late 1990s to provide a minimum death benefit no matter what happened to investments in the stock market, Nowacki said. Those guarantees came back to haunt insurers when the market tanked and forced them to set aside more money in reserves.

Still, experts say, the insurance industry overall is healthy.

Belth argues that it's not the industry that a consumer should be worried about. "They don't buy from the industry," he said. "They buy from one company."

Consumers should check an insurer's rating with at least three agencies to make sure that one isn't giving a company a good rating while others are raising warning flags, experts said.

The five major rating agencies are A.M. Best, Fitch Ratings, Moody's Investors Service, Standard & Poor's and Weiss Ratings Inc. The first four are paid by insurers to conduct a rating, and the agencies' ratings are available free online.

Weiss makes money instead by selling its ratings to consumers and others. But this month Weiss is offering its ratings, which usually cost $7.95, for free at

Belth's newsletter also publishes an annual ratings issue for $20 at

The agencies use an alphabet system to rate companies, although the meanings vary from firm to firm. That can make it confusing for consumers and difficult to make comparisons.

"If I got a 'B' [in school] I was pretty happy. But to some rating companies, a 'B' is pretty bad," said Bob Hunter, director of insurance for the Consumer Federation of America. "You can't go on your instinct of what A, B, C and D means. It's important to read and understand the ratings."

Experts suggest that consumers stick with the top-rated companies for life and other long-term policies.

"When it comes to insurance, you want to use a highly rated company even if it means you will pay a higher premium," said Ted Toal, a Severna Park financial planner.

That reduces the risk, Toal said, that policyholders will end up with a company that goes under, and that they "will find themselves without insurance and have to go through the process of obtaining new insurance, possibly at higher premiums, or they may not qualify again for some medical reason."

Once a policy is purchased, review the insurer's rating annually, experts said. If the rating is lowered, it doesn't necessarily mean policyholders should abandon the company, especially if it remains highly rated.

"The reason for the downgrade would play some part in whether you re-evaluate having a policy with the company or not," Toal said. For example, an insurer that's downgraded for massive claims and is unable to add to its reserves may be a reason to switch insurers, he said.

Before switching insurers, weigh the cost and consequences, Toal added. Dumping an annuity in its early years can lead to hefty surrender charges, he said. There may also be charges related to dropping a cash-value life policy early, or consumers might find it hard to replace a canceled policy.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose

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