When you invest time and money to insure what is important to you, the last thing you want to find out is that you've lost your coverage. It's a real possibility, but few of us take it into account when choosing an insurance company. We think of insurance companies as permanent and reliable but they're a business, and just like any other business, they can fail.
This article will help you understand why insurance companies fail, what happens to you when your insurer goes out of business, and how to identify an insurance company that is likely to stick around as long as you need it to.
Why Some Insurance Companies Fail
Insurance companies invest the money they collect from insurance policy premiums on insurance policies to pay future claims. While that normally ensures their continued operations, it does leave them vulnerable: if they engage in poor business practices, the economy takes a nose dive, or the financial markets collapse, they may not have enough resources set aside to stay afloat.
Technically speaking, insurance companies that fail don't go bankrupt; rather, they go into a resolution program run by their home state's guaranty association. There is no federal agency, such as the Federal Deposit Insurance Corporation, governing insurance companies. So, in a way, those guaranty associations insure the insurers.
How a Company Failing Affects Your Policy
While the guaranty association has robust regulations to protect policyholders, it doesn't guarantee the replacement or full cash value compensation of your policy if your insurance company fails. This can affect you in various ways. You might, for instance, have your life insurance rates increase because your new insurer will re-assess your premiums based on factors such as your health and age (learn more about What Influences Life Insurance Premiums). If you are now deemed too high a risk, your new insurer might even refuse to issue you a policy.
Some insurance policies also have a cash value. If the failed insurance company's financial situation is bad, they may not have the assets to pay all or even part of it back to you.
The Role of Guaranty Associations
Each state coordinates a response to the failure of insurance companies within its jurisdiction but guaranty associations are only in place to mitigate losses. They do not provide full compensation and, to make matters even more complicated, the limits for claims with guaranty associations vary from state to state and only certain losses are covered.
The National Organization of Life & Health Insurance Guaranty Associations does coordinate state guaranty associations but, under its model, life insurance policies are only protected up to $100,000 in cash value and annuities to around $250,000.
How to Find Reputable Insurance Companies
Fortunately, insurance company failures are rare. But they do happen, so if you intend to pay a monthly premium to protect yourself, your property, and your business, you need to know that the company you choose is reputable.
The good news is you can find a solid and reliable insurance company without much trouble. Before you commit to a policy, do a little homework. Everyone wants to save a buck or two when they can but cheaper isn't always better, especially when it comes to your insurance.
Research the Company
Access their financial rating on sites like A.M. Best, Standard and Poor's, and Moody's. Choose only one site to compare ratings between various companies, since each has its own rating scale and method. For instance, A.M. Best uses the company’s financial statements, business profile, and operating performance to award its ratings, with A++ as the highest.
Keep in mind that top companies have the ability to pay policyholder claims because they have strong investment portfolios, including bonds, notes, and securities. However, ratings do not tell you how investments may perform so you should treat them as opinions, not facts.
Check the State Guaranty Fund
Make sure that the company you are considering is "admitted" into your state’s guaranty fund. Without this safeguard, you won't be protected against loss should something go wrong.
An admitted insurance company must conform to state regulations and submit their rates for approval. To find out whether a particular company is admitted, research admitted insurers in your state.
Consult Customer Service Ratings
Check out the company’s customer service performance and the number of disputes. Every company has issues, but the good ones work hard to resolve them. Do some digging online to get a feel for the way the company you are considering does business.
Consumer Affairs posts customer complaints, and many of them are valid. Pay special attention to the number of complaints. If a large insurer has had 26 complaints, your initial reaction might be to panic, but refrain from doing so until you have a look at the dates. The 26 complaints might be over the course of five years, which means the company received on average only five complaints a year, and that’s not bad.
The Better Business Bureau (BBB) is another great resource. Businesses are not required to belong to the BBB, but many register with them to build trust in their brand. The BBB website indicates how many closed complaints a company had over the past three years. You can view the types of complaints and find out how many the company tried to resolve in good faith but that still left the customer unsatisfied. This information tells you a substantial amount about how much a company cares about their customers.
Review the Claims Process
Is the company's website easy to navigate? Is there a toll-free number available to talk to a real person? What about e-mail, office hours, and a physical address? Can you get a free, no-obligation quote? Does everything look legitimate and trustworthy? All of this is important, not only because you'll need to contact the company any time you need to change your policy or file a claim, but also because durable companies tend to provide high quality customer service.
Look for Relevant News Coverage
Don’t forget to check the news when you consider an insurance company. Simply search the company's name on national and state news websites and see what kind of headlines come up.
Companies that appear solid are not immune to failure or poor decisions. Just think back to the American International Group bailout from a few years ago. AIG was the world’s largest insurance company and boasted an A+ rating, and yet, suddenly, all of the credit-reporting agencies downgraded it. So, if stories of financial woes or drops in stock prices pop up in your search, look elsewhere for a policy.
Diversify Your Policies
Finding a good insurance company is an important steps, but when it comes to insurance, putting all your eggs in one basket isn't always the best option. Diversifying your policies with multiple insurers will reduce your risk. Having one company handle every type of insurance for you could be disastrous if that company goes under.