Insurance and the Banking Crisis - What's the Risk to Me?

By Insurance.com Posted : 10/15/2008

With the current financial crisis in banking, are you starting to worry about your insurance company, too? After all, taking risks is what insurance is all about, so how do you know if your company has taken on too much risk-"and if they will be ready to pay for a claim when it happens?

The good news is that insurance companies have strict requirements for setting aside money today (called loss reserves) that will be used to pay claims in the future. Every insurance company is monitored by a state department of insurance and each company must report its financial status annually. States look carefully at the loss reserves each company establishes to ensure its consumers are protected.

Strict Financial Regulations
"While some insurers are owned by companies that operate a wide range of businesses, it's important to remember that the financial condition of an insurance company is closely regulated and is often not subject to the same types of risks as those in unregulated industries. With recent events, many insurance commissioners have assured consumers that they are looking closely at insurance company financials, in order to protect consumers in their state," comments Sam Belden, Insurance.com VP-Strategic Alliances.

To determine the financial stability of an insurer, check the ratings from A.M. Best Company. It's an independent rating company that assesses a company's ability to meet its future financial obligations-"to make claims payments. Companies that maintain an "A" rating or better are determined to have Excellent or Superior financial stability. To check for your company, go to www.ambest.com.

-��It's important to remember that the financial condition of an insurance company is closely regulated and is often not subject to the same types of risks as those in unregulated industries.-�� -"Sam Belden, Insurance.com VP-Strategic Alliances.

If an insurance company is in poor financial condition, state insurance regulators can take various actions to try to save the company. If they are not successful and a company becomes insolvent (which means they are basically declaring bankruptcy), the state insurance department is responsible for making sure that current and future claims are still paid on behalf of the insolvent company.

State Insurance Guaranty
There's one further safeguard for policyholders. Most states have insurance guaranty associations (known as guaranty funds) for the purpose of paying the claims of an insolvent company. Insurers are required to be members of guaranty associations as a cost of doing business in that state. When there is insolvency, the other companies are assessed based on business they do in that state, so that claims can be paid. Other states, like New York, have a pre-assessment system, which requires insurers to contribute money each year to a permanent insolvency fund. This money is then available to pay claims when a company is not able to do so. Either way, consumers are protected first.

So, is there a reason to switch insurance companies? Consider your actual experience with your company. Are you happy with them? Do they respond to service requests and claims promptly? Does their website provide access to your policy and information about the company? Do they have a solid rating with A.M. Best Company? If you've had no problems with them over the years, have seen your rates stay consistent with no major premium increases, and if you've had good experiences during the claims process, then you should seriously consider staying put.

Good Reasons to Switch
One time to consider changing companies is if you're unhappy with your current insurance company or you simply haven't checked rates for a year or so. Increasing premiums or a change in your personal circumstances might present an opportunity to check for savings (moving, getting married, or other major life events).

If you are shopping around, be certain that you keep your current policy in place until your new coverage starts. Even a lapse of a day or two can be troublesome when you look for coverage from a new company. Insurers offer their best rates to drivers who maintain "continuous insurance coverage" because drivers who keep their coverage in force have fewer losses than those who do not. While a few days may not seem like much, it can be costly in terms of the rates on your next policy. And in today's economy, saving on car insurance is a big deal.

If you have questions or comments about the current economic turmoil and insurance, please let us know.

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