Can My Insurance Company Go Bankrupt? Insurance Rating and Financial Stability

At one time not long ago, Enron was the sixth largest corporation in the United States. Within a year of reaching this distinction, it ceased to exist. Could the same thing happen to your insurance company?

Insurance Companies Profile You - Do the Same to Them!

To establish the rates you’ll have to pay, insurance companies gather every piece of available data about you and put it into a computer. The computer then compares your “profile” against all existing information to see how much risk you pose for your insurer. But have you ever considered doing the same?

Thousands of people had billions of dollars invested in Enron. Some people had their entire life savings in the company’s stock, and when it went bankrupt, they were left with nothing. Luckily, insurance companies are exempt from the bankruptcy code. If an insurer becomes insolvent, the government steps in to pay all outstanding claims.

But this doesn’t mean that there’s no risk to a potentially insolvent insurance company’s clients. In order to avoid a government takeover, a financially weak insurance company will desperately try to hold on to every penny in its bank account, which means that it will do everything possible to avoid paying claims. Furthermore, if the government does step in, there are usually caps on the amounts it will pay, and all claims could be delayed by a year or more, as your insurance company deals with its insolvency in court.

How to be a Profiler

The strongest of all insurance companies are the large, publicly traded corporations. These companies are legally bound to release financial information to potential investors, and while you may not be interested in your insurer’s stock, you can still review its finances. Find out your insurance company’s ticker symbol and look up its information on Yahoo! Finance or MSN Money.

Or, if you’re not an accounting or finance buff, you can head to your local library to check out Standard & Poor’s. S&P produces an annual guide that rates the credit-worthiness of all publicly traded firms from AAA (best) to D (immediately cancel your policy and find a new insurer!). Other services that rate the financial health of public companies include Moody’s and Fitch Ratings, both of which employ similar graded systems.

Insurance is a financial product. If you treat it like a commodity, in which every insurance company is selling exactly the same thing, then you will lose out. You need to evaluate every aspect of your coverage - its depth, its breadth, and the financial stability of the company supplying it. Don’t be afraid to ask potential insurance agents about the financial well-being of their employers. Agents who hesitate to respond, don’t know, or answer with vagaries like, “This company has been around for 20 years, so it’s safe,” should be avoided. Comparison shop for the policy that best fits your needs, and don’t be seduced by low monthly payments - insurance from a company that refuses to pay claims isn’t worth the paper that your policy is printed on.