How safe are US life insurance companies?
All US life insurance companies are state regulated. By law, they must have sufficient in reserve to meet their claims. In addition, state insurance regulators have the right to take over a subsidiary that is in financial difficulties and keep it as an on-going concern in the interest of policyholders. Unlike banks, investments made by insurance companies are very strictly controlled and regulated as they operate under the "risk based capital system". This dictates the maximum allowable percentage they may invest in any particular share class.
What happens if a US insurance company is declared insolvent?
One of the key functions of state insurance departments is to protect policyholders from the risk of an insurance company falling into financial distress. When an insurance company enters a period of financial difficulty, the insurance commissioner in the company’s home state initiates a process—dictated by the laws of the state—whereby every attempt is first made to help the company regain its financial footing. This period is known as rehabilitation. If it is determined that the company cannot be rehabilitated, the company is declared insolvent, and the laws of the state require the commissioner to ask the state court to order the liquidation of the company.
State life and health insurance guaranty associations are state entities created to protect policyholders of an insolvent insurance company. All insurance companies licensed to sell life or health insurance in a state must be members of that state’s guaranty association. The association is called upon when an insurer falls into financial difficulty and there is a shortfall of funds needed to meet its obligations. Each insurer in that state is required to assume a portion of the liabilities of the insurance company in liquidation such that all its claims are covered. This portion of the liability is determined based on the amount of premiums that they collect in that state.
So what happened with AIG?
AIG is a financial holding company which owns 71 U.S.-based insurance entities and 176 other financial services companies around the world, which include bank, securities firms and non-US insurers. The holding company fell into a solvency problem due to the non-performance of its non-US related insurance business. The holding company invested in credit default swaps on mortgage-backed securities. Due to the worldwide credit crunch, these default swaps were triggered resulting in AIG’s holding company being called upon to meet its obligations.
How can I be sure that an insurance company is financially sound?
Financial Strength Rating (FSR) provides an indication as to the financial strength of an insurance company. Companies such as AM Best or Standard & Poor’s provide a rating service of insurance carriers’ financial strength and their ability to meet ongoing obligations to policyholders. AIG, for example, is still rated A- (excellent) by AM Best.
How is Centurion spreading the credit risk exposure to US insurance companies?
We currently hold policies from 48 different insurance companies. Our top five insurance carriers are all rated A and above from AM Best, Moody’s or Standard & Poor’s and 22% of the current portfolio has a rating of AAA. Where there is a high concentration of credit risk in any one carrier, we have the ability to swap out our risk with a AA-rated bank. This we have effected with Credit Suisse.
Within our current policy portfolio, less than 5% of our policies have credit risk exposure to American General Life, a subsidiary of AIG.
Historically how does the insolvency of banks compare to that of insurance companies in the US?
In the 1980s, the United States experienced its most serious banking crisis since the 1930s and the second most serious crisis in its 200-plus year history. The first was in the 1930’s when between 1929 and 1933, the number of banks declined from 26,000 to 14,000, mostly by failure. The next serious banking crisis was in the 1980’s which affected commercial banks, savings banks and savings and loan associations (S&Ls). Between 1980 and 1991, when fundamental corrective laws were enacted, some 1,500 commercial and savings banks (insured by the Federal Deposit Insurance Corporation) and 1,200 savings and loan associations (insured by the former Federal Savings and Loan Insurance Corporation) failed and were resolved by the regulatory agencies.
Although the US insurance industry has not had quite a dramatic history, a number of smaller insurance companies have either become insolvent or have been designated to be financially impaired, which can be defined as when the first regulatory action is taken by a state insurance department including involuntary liquidation of the company due to insolvency. According to a recent report, of the 5,044 individual US insurance companies that carried a Best’s FSR, 685 companies became impaired over a period of 30 years between 1977 and 2007. The report also concluded that the lower the FSR rating of a company, the higher the rate of impairment and that no insurance company rated AA+ has been impaired since the ratings were introduced in 1992.
What is the difference between insolvency and bankruptcy?
Insolvency is when a company is unable to pay its obligations. In the case of an insurance company, insolvency means that the company has insufficient funds in its reserves, as defined by the state regulator.
Bankruptcy is a legally declared event triggered by the company’s liabilities exceeding its assets. Companies entering into bankruptcy are afforded certain protection by the laws in order to allow it to restructure its finances in hopes of meeting its obligations in the future. In the US, this process is known as Chapter 11.
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