How healthy is your insurer? - part one of two

Jack Benny once said he didn't really know how much life insurance he carried then quickly added, "...but when I go, the Pru goes!"

Well, the Prudential outlasted Benny, and they seem to be OK; but some policyholders today have good reason to be concerned with whether their carries will last long enough to meet their obligations: one need only recall Executive Life Insurance and Mutual Benefit Life, of recent memory. Generally speaking, carriers whose main business is property and casualty insurance have presented less of a problem to their policyholders than those which specialize in life and health insurance and annuities. The latter group have invested much more heavily in real estate and high yield debt ("junk bonds") and are paying a heavier price today. Still, among the critics and followers of the property and casualty companies there is ample concern with the long and not-so-long term health of the industry.

Most Carriers Are Healthy

According to the John Liner Organization, a highly respected insurance advisory service, the overwhelming majority of property and casualty carriers are healthy. But they also point out that from 1984 through 1990 225 P/C insurers became insolvent. Of that total, 106 failures occurred in |88, and '90. Furthermore, in the first nine months of 1991 there were 22 insolvencies. They go on to point out that the rate of failure among medium and large carriers appears to be increasing. Some consolation can be taken from the fact that New York State has a guaranty fund which will pay certain claims of an insolvent carrier up to $1 million per claim, but this is hardly where the insurance buyer wants to find himself. For the New York real estate owner, operating in an expensive, densely populated, congested and highly litigious atmosphere, the $1 million claim threshold is easily reached.

What's the Buyer to Do

The reasons and theories offered to account for this state of the industry are many and varied, ranging from the state of the general economy to the confluence of the planets. But our task here is not to analyze the problem but, rather, to offer practical advice for the insurance buyer who wants to avoid getting crushed when his carrier rolls over.

As in many of the financial sectors, there are two bodies of information accessible to the prospective insurance buyer. For the moment, let's call them formal and informal. The first is readily available: services such as A.M. Best, Standard and Poor's and Moody's Investors Services are well known. Their reports are easily obtained in the business section of a good library.

Most of the rating services use a system of alphabetical and numerical codes to categorize and quantify to the extent possible their opinion of a given carrier's financial strength and claims-paying ability. These publications also contain detailed explanations of what each assigned letter or number grade means so that the overall rating Can be "decoded." Some of the many factors that enter into these published opinions are the quality of a company's assets, the adequacy of their loss reserves, and the soundness of management. Best's, the oldest and dominant service, uses nine basic rating categories ranging form A-plus-plus F (insolvent and in liquidation!); but as a practical matter, few brokers will ever recommend a carrier with a rate lower than B-plus. The differences among rates in the A to B ranges can be a matter of nuance. Indeed, some students of these rating systems maintain that the trend of a carrier's rating may be more significant than the actual rate in any given year. In other words, steady B-plus rating for the last five years may no cause for concern, but a rating recently reduced from A-minus to B-plus bears investigation. Lately, critics have asked the question, "Who's rating the raters?" This line of inquiry arises from the very poor financial results recently reported by some carriers who have continued to receive high ratings from the services mentioned. Some have suggested that this is the result of commercial or statistical biases built into the rating criteria. So to complicate life, one should probably not rely on just one set of rates without reference to some of the others.

Other Sources

All major carriers publish annual reports. For the reader willing to ignore the glossy photos, roll up the sleeves and wade into the arcane accounting information, including the footnotes, there's a load of much telling information to be found. The Wall Street investment houses publish research reports and buy/sell recommendations, also available in some of the larger libraries. Conning and Company, an investment firm in Hartford, specializes in the insurance industry. Again, however, the problem of "who's judging the judges?" confounds the diligent buyer. For instance, in the past several years some presumably very reputable auditing and accounting organizations have become the objects of heavy criticism and lawsuits for failing to qualify their professional opinions of the financial condition of certain insurance carriers whose books they audited.

The bottom line, if you'll permit a financial pun, is that it's not easy. The busy real estate executive has plenty to keep him occupied in the New York environment these days. His job does not leave a lot of time to do research on his insurance carrier. And it is especially daunting when the very sources of "hard" information are sometimes a bit soft in the belly themselves. In our next column we will continue this subject, focusing on some of the "informal" channels of information aluded to earlier.

Marc Cohen is an account executive with Kaye Insurance Associates. He specializes in Kaye's comprehensive multi-peril insurance program, especially designed for residential real estate properties. Kaye Insurance Associates is one of the largest brokerages in the nation.

COPYRIGHT 1992 Hagedorn Publication
COPYRIGHT 2004 Gale Group