How does your insurer rate?

Perhaps it’s not the most obvious question but, before you buy your next insurance policy, are you sure your insurer will still be in business in six months time? So now you are looking surprised. Surely there can’t be anything wrong with our insurance companies, can there? Well, let’s take a quick look over at the banks. So far this year, US regulators have closed down forty-five failing banks. In 2010, 157 banks failed, rising from 140 failures in 2009. Put another way, although the majority of the larger banks have managed to find a safe harbor in our economic storms, many of the smaller banks are struggling to survive. No matter which part of the country you look, we have the same problems. Property values are still falling, while loan defaults are occurring across the board as unemployment remains high. . .When it comes to banks, there’s a federal insurance corporation designed to pick up the pieces. Currently, it’s about $1 billion in debt but, with all the premiums it collects from the surviving banks, it should be close to breaking even by the end of this year. Did you know there’s a property and casualty guarantee fund designed to look after failed insurance companies? The idea is to give us, the consumers, a safety net should our insurer be insolvent. But there’s never a need for that, is there? Well, the industry expert is A M Best and, as of 2009, it reports there were at least 20 insurance companies receiving help from the fund. This was an increase from 15 failed insurers in 2008. Let’s be clear about this. Any company can hit problems in difficult economic times and there’s no special rule for insurance companies. For example, two Florida insurers were wound up in 2009 but there’s no real publicity given. The fund simply steps in and ensures a smooth transition of the active policies to new insurers. In one sense this is all very reassuring. The existence of the fund usually ensures that, even if your insurers goes into liquidation, any existing claims should be met by whoever replaces it. But there are always delays when this happens. It’s better if you pick insurers with strong ratings.A M Best publishes regularly updated listings of all the insurers in the US, giving ratings to show their financial strength. For example it has just downgraded the State Auto Insurance Companies, based out of Ohio. In reviewing the performance of the company, it found it has been hit particularly hard by bad weather claims in both its property and auto businesses. There has been a real increase in the severity of storms, tornadoes and hurricanes. In previous years, these losses were shared through reinsurance but, recently, other companies have been refusing to reinsure State Auto’s business. This change in the structure of the business does not mean it will go out of business tomorrow, but it’s something to watch over the next few months. If the profit margins continue to shrink, the company could fail unless it finds additional capital. So, if the ratings are downgraded again, you should get auto insurance quotes from other insurers and be prepared to move your policy.

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