You pay insurance premiums every year and expect your insurance company to pay claims when they arise. However, have you ever considered the possibility that your insurance company may not be able to pay your claims? Insurance company failures have occurred throughout history and many large companies have become insolvent. You need to investigate your prospective insurance company’s financial strength to make sure it will be around to pay your claims. In addition to financial stability, it’s a good idea to review the prospective insurance company’s history of service and consumer complaints.
Each state’s department of insurance regulates the insurance companies that are licensed to do business in the state. If you go to the National Association of Insurance Commissioners (NAIC) website, it will have a link to each state’s department of insurance. Once you have navigated to your state’s page, you can find a tremendous amount of information about the insurance companies writing policies in your state.
Your first step should be verifying that your insurance company is licensed to do business in the state. Occasionally, unlicensed companies will attempt to sell insurance policies, so do not make an automatic assumption that all companies are lawfully conducting business. Additionally, each state should have a database of complaints filed against the insurance companies. If you are choosing a prospective insurer, it’s a good idea to see how many and what types of complaints have been filed against the company.
As part of the licensing process, insurance companies agree to submit to the department of insurance’s audits and examinations. This process allows the state to regulate the business practices of the insurance companies and prevent insolvencies. In addition to state regulators, most insurance companies submit their financial information to rating agencies such as A.M. Best, which provides thorough analyses and evaluations of insurance companies.
To check an insurance company’s A.M. Best rating, go to their website and enter the insurance company’s name in the search field. Sometimes, you’ll need to look carefully at your insurance policy or proposal to figure out the exact name of the insurance company. The rating you see will consist of two different categories: financial strength (in the form of a letter grade) and financial size (in the form of a roman number from I to XV). The first rating is based upon A.M. Best’s analysis and the latter rating is simply based on the policyholder surplus, or equity, in the company. Keep in mind that these ratings will change from time to time, as the insurance companies must regularly report their results to the state as well as the rating agencies.
Another thing to consider is whether or not your insurance company is a member of your state’s insurance guaranty fund. Most insurers pay a small portion of the premium they collect into a fund that is intended to pay claims on behalf of insolvent insurers. However, even if your insurance company belongs to the fund, that’s not always a perfect solution. If too many insurers become insolvent, the fund may face its own financial challenges and claims may be discounted. In such situations, you can only receive a percentage of what you would otherwise have received in full from your insurance company.