The constants of the financial world are not quite as permanent as we all thought. Storied Wall Street institutions like Lehman Brothers and Bear Stearns are going or gone. And last week the insurance giant American International Group (AIG) needed an $85 billion bailout to prevent it from sliding into a bankruptcy that might have ripped through the Fortune 500—most of which have policies with AIG. That raises the question: just how healthy is the insurance industry? Can you be confident that your insurance carrier will be there when you need them most?
Take a deep breath. "Most insurance companies are in very strong financial shape," says Bob Hunter, director of insurance at the Consumer Federation of America, a Washington-based consumer-advocacy organization. "Most people don't have to worry." But that doesn't mean that you shouldn't be cautious. Here are five things you need to know about your insurance company.
Check for licensure. Even when you're buying your insurance from a national carrier or through a broker, it's a good idea to make sure the insurance company is licensed in your state, say consumer advocates Asa Aarons and Noreen Seebacher of JustAskAsa.com. "Insurance companies need to meet certain minimum standards to be licensed by state insurance departments," says Aarons. You can do that by checking with the company, the broker or your state insurance commissioner. When a company is licensed, that state's insurance commissioners keep a close eye on the company's cash reserves to make sure that it has more than enough money on hand to pay the claims that may be made, protecting the consumer, says Sandy Praeger, president of the National Association of Insurance Commissioners.
Contact your commissioner. State departments of insurance have some useful information, says Doug Heller, executive director of Consumer Watchdog, a Santa Monica, Calif.-based consumer-advocacy group. "It's not enough to just say, 'You just have go to your department of insurance Web site,' but there is some value there," he says. Praeger advises calling the state regulatory office to find out any details about the insurer that might not be on the Web site. There, she says, you will typically find shopping guides that include the questions you should ask before buying a policy. The insurance commissioner's office should also be able to tell you basic information about the company, including the company's last rate increase. "It's pretty hard, with the kinds of oversight that the states provide, for insurance companies to become insolvent quickly," she says, adding again that it wasn't the insurance units, but the other business units, that were the downfall of AIG.
Look at ratings sites. Seebacher says that you can check the financial stability your insurer through various rating companies, including A.M. Best Company, Standard & Poor's and Moody's Investors Service. These companies are essentially the credit-rating agencies for businesses and government, telling you the rating agency's evaluation of the company's financial solvency and its ability to pay its claims. Ratings range from A++ and A+ (top grades) to F (liquidation). Simply register and search for your insurer (by state) to find the rating. The higher the grade, the more financially sound it is, in the estimation of the rating agency. Similarly, the NAIC Web site has consumer information and company ratings. Be careful here, warns Hunter, because the NAIC comparisons include all sizes and quality of company, so be sure you're looking at insurers that are of similar size and reputation as your company, he advises.
Go to the source. Aarons suggests calling the company's customer-service line and asking point-blank questions about the company's rating and solvency. Don't be afraid to go up the management chain until you find someone who can speak knowledgeably about the company's condition. "If the company hedges or provides misinformation, think twice about doing business with it," he says. You can also do some sleuthing on public companies' earnings and business operations by checking out the media or investor-relations sections of their Web sites, where you can access announcements, financial statements and annual reports, says Seebacher.
Shop your policy — at the right time. Be wary if an insurance broker calls you, hawking fear about your policy, says Praeger. "We're seeing some of it now, this churning of policies," she says, adding that some states are considering contacting brokers to warn them against this type of behavior. Instead of making a hasty decision, start shopping around for a better price or a company you believe is more stable, and wait for your renewal period. Be sure to check out several companies to be sure you're opting for the same or better coverage for the lower price, she says. Bottom line: "Relax and take your time," adds Hunter.