Check Out the Health of Insurance Providers

Everybody knows about the savings and loan crisis. But few are aware of the growing failures of life and health insurance companies, a problem that could have serious consequences if you have a policy with a company that fails or is in danger of failing.

Because there is no federal or state bailout fund in California for life and health insurance companies similar to federal deposit insurance for banks and S&Ls;, you could be left waiting years to get your claims processed if your insurer fails.

Accordingly, now might be a good time to check on the health of your insurance company if you are buying a new policy or if you already have one.

The causes behind the failures of life and health insurance companies are complex. A major factor has to do with bad and excessively risky investments that many of them made in order to fulfill promises of more lucrative investment returns. Some companies misjudged the risks of the lines of insurance they offered, charging premiums that in retrospect were too low. Some companies, particularly smaller ones, were simply mismanaged.

As a result, four California-based companies have been declared insolvent by state regulators since 1986, including two so far this year, says Ronald G. Rosen, a deputy California insurance commissioner. That compares to none between the early 1970s and 1986, Rosen says.

The national trend is similar: Some two dozen firms have failed nationwide since 1987, compared to only about one a year previously.

To be sure, the failures so far have been limited mainly to smaller, newer companies. But some bigger ones also are beginning to see an erosion of their financial health.

Unfortunately, while every state has guarantee funds that will protect your claims in case your property and casualty insurer collapses (covering such things as auto and homeowner’s insurance), California is among about a dozen states that does not have a life insurance guarantee fund.

Efforts to create a guarantee fund here have failed in the state Legislature, largely because of disputes over how fees would be assessed. Voters a few years ago also rejected an initiative that would have created such a fund.

Thus, if your insurer fails and you or your beneficiaries have a claim or death benefit due, there may be little you or they can do but wait in line along with other creditors, Rosen says. The process of selling off the company’s assets to generate money to pay you and other creditors could take years. And even then, you may get only 50 cents on the dollar or less, Rosen says.

Fortunately, some states with guarantee funds will pay claims owed to policyholders in California and other states. But other states won’t.

In those cases, “there’s nothing else that can be done. It’s too bad, really,” Rosen says.

Therefore, it is important when shopping for insurance to assess the financial health of the insurer.

Financial data on California-based firms is available for public inspection at the state Insurance Department (there are offices in Los Angeles, San Francisco and Sacramento). But let’s face it: Even sophisticated analysts can’t always decipher the financial gobbledygook.

Thus, the best way to proceed is to check ratings of insurers by A. M. Best Co., the leading insurance company rating service. It publishes a guide, “Best’s Insurance Reports, Life-Health Edition,” containing financial information and ratings on about 1,500 insurers. The guide can be found in most bigger public libraries.

Best assigns companies one of nine ratings, ranging from A+ for the financially strongest to C- for the weakest. Best also has 10 categories assigned to companies it cannot rate. NA 2, for example, is given to a firm that Best cannot rate because it is too small. NA 3 means that the company does not have five years of experience in the business, while NA 7 means that the insurer’s financial health is below even the minimum standards given to C- firms. NA 10 means that the firm is under supervision by state regulators, which could mean that it is insolvent and under rehabilitation or in liquidation.

No company that has ever carried an A+ rating has failed, says Paul E. Wish, a vice president at Best. About one in five companies rated today enjoy that top ranking. And only a handful of companies rated A have collapsed, Wish says.

Some experts accordingly suggest sticking to companies with an A+ rating for at least 10 years.

If going to the library seems like a hassle, ask your insurance agent or broker for the rating and for an assessment of the health of the company. He or she should have access to Best data. If not, find another agent.

“That’s what they get a commission for, to do legwork for you,” Rosen says.

But the ratings are not foolproof, Wish cautions. Some companies provide fraudulent financial information. Or Best analysts may be wrong. Or the ratings may be outdated, as libraries often carry only the annual edition, not the quarterly supplements. A company’s financial condition can deteriorate faster than Best can downgrade its ratings.

Also, remember that the ratings are not the end-all. A firm with a high rating may provide lousy administrative or claims service.

Of course, if you have a group health or life policy through your employer, you may not have much choice over picking the insurer. Some employers have paid claims when their insurers failed, but others have left workers in the lurch.

What if you have an existing policy with an insurer that you find to be financially shaky?

If you have a term life policy (one that provides for only a death benefit, without a savings or cash-value component), it is easy to switch to another firm because term policies usually are renewable each year anyway.

But if you have whole life, universal life or any other type of policy with a cash-value component, switching may not be prudent, suggests Gail Hillebrand, a staff attorney with Consumers Union, publisher of Consumer Reports magazine. That is because the policy may have already built up a large savings component that you could partly lose if you terminate, she says. And when you open a new policy, you may be subject to new commission charges, while the savings component won’t build up quickly in the early years.

Bill Sing welcomes readers’ comments and suggestions for columns but regrets that he cannot respond individually to letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.