You might think all the media coverage about insurance company shenanigans makes their operations transparent. My mother used to say, “You have another thought coming.”
We are a largely believing group. This is a major reason we got into the financial mess that we are currently trying to get out of. We’ve all learned the hard way that we must stop listening to what others say and do our own research before making our own decisions. It’s a good place to begin is with the insurance companies that we choose to work with.
Insurance is an essential part of wealth development and financial security. We need to choose the right companies. They will be able keep their promises and fulfill their contractual obligations. How do we know which ones are good? The ratings will be enough. Wrong!
The ratings themselves are the first problem when looking at ratings. When I saw a company rated A+ I thought “Wow, this is just the best.” It does. Fitch used the A+ rating. But most people don’t realize that Fitch uses other ratings, such as AA-, AAA+, and AAA. If the ratings aren’t clear enough for you, we might be able to make some sense of the companies that rating groups have rated as “Excellent.” This is a bit problematic. Take into account the fact that Standard & Poors rates “Excellent” for more than 80% of the insurance companies rated.
This issue is further complicated by the fact that Standard & Poor’s and Fitch have made billions from rating fees. Many of this money was earned by initially rating mortgage-backed securities “Investment grade”, and later downgrading them to “speculative.” It makes me wonder if their ratings ever had anything to do the fees they charge. My suspicions are shared by you. This put us all in a difficult position. Ratings and the industry seem to have more twists than a bag full of baby snakes. Can we really trust them? Within reason, yes. On my desk is a brass owl. It reminds me to keep my eyes wide open. This is how we should deal with insurance companies. We need to keep our eyes open.
A.M. Best conducted a 30-year study between 1977 and 2007. The study revealed some interesting findings about insurers that were “impaired” within one year of receiving their rating. Surprisingly, 0.06 percent of companies rated in A+/A++ top-tier were impaired one year later. 2 percent of the rates B/B- dropped, and 6 percent of the C/C– rates were down. Although these numbers may seem small, they are a significant percentage difference. In actual operation, the risk was 33-100 times greater for those in the bottom two ranges. The ratings were therefore reasonably accurate for Best.
What are we supposed to do? Homework!
My children will tell me that I have said it a thousand times to them (reasonably, its probably more than that). “The quality and quantity of your life are entirely dependent upon the quality of your decisions. Make good decisions. The quality of your interaction with your insurance company will depend on how you choose to do business with them. Let’s be a bit skeptical. Shop around when you have to make insurance-related choices. All ratings are available. Take a look at the company’s past stock prices, profitability, and growth. Ask agents from different groups. Take everything you have learned and then sift through the hype and hyperbole. Then, look at the evidence to determine what you should do. You will make better decisions and breathe easier.
