March 2009 Rating Downgrades/Watch-List

"Isn't it appropriate that the month of the tax begins with April Fool's Day and ends with cries of "May Day!"?" ~ Rob Knauerhase

Those of you who are CPAs are finishing up tax returns for many of your personal clients, and thus likely have in your tax processing system the names of the insurers for the life insurance policy holdings of your clients.  Take this opportunity NOW to search your system for the names of the below insurance companies that were either downgraded or put on the watch-list this month and contact your clients to demonstrate your good stewardship of their financial affairs. 

It is HIGHLY important to monitor the ratings of the company behind your (client’s) policies to determine if you(r clients) are being provided with the most suitable and appropriately priced product.

When an insurer's rating is downgraded, the change often means that either the insurer's profitability has declined, the insurer's reserves have deteriorated, or both. The insurer's most immediate response to a downgrade in its ratings, and its most effective means for restoring profitability and recovering reserves, can be to increase policy costs for cost of insurance (COI) charges and expenses. In other words, when ratings go down, policy charges are more likely to be increased, and thus premiums are likely to (need to) go up.

If you(r clients) do not know what they are paying for cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based "wrap fees" (e.g., M&Es) and premium loads in their life insurance policy holdings now, then there will be no way to know if or when such policy expenses are increased. Now is the time to find out.

INSPECT WHAT YOU EXPECT! Use a Confidential Policy Evaluator (CPE) Research Report to measure policy expenses and know if a particular insurer is increasing or decreasing policy expenses.

Rating services like A. M. Best, Standard & Poor's, Moody's, Fitch and TheStreet.com continually evaluate insurance carriers for their financial strength (i.e., the profitability of the insurer's business operations) and claims-paying ability (i.e., the sufficiency of insurer's reserves compared with its future claims obligations). While rating services may focus on different key indicators or qualitative factors, all ratings reflect some combination of these two measures.  The below list of life insurance companies have either been downgraded by or placed on a watch-list by one or more of the above ratings services.

However, please note that different ratings services have different means and methods for determining when an insurer should be downgraded and/or placed on their watch-list, and thus different ratings downgrades and watch-lists have different meanings. For instance, only certain ratings agencies are registered with the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization ("NRSRO") and thus subject to SEC regulation and utilized by insurance regulators. As such, some insurers, agents, brokers and/or insurance consultants view NRSRO-registered ratings services as being a more credible indicator of a given insurance company’s reserves and claims paying ability.  For a list of these ratings services who are NRSRO-registered, click here.

In addition, certain ratings are “voluntary”, which is to say the insurer must cooperate with and pay a fee to the rating service for their rating of that insurer. Of course, this cooperation can result in a rating that is based on more information and insight into the financial strength and claims-paying ability of the insurer than that available to “involuntary” ratings services. However, given insurers can “shop” for the most liberal “voluntary” ratings and are usually permitted to withdraw their cooperation when they feel certain public disclosures could hurt business, and given ratings service dependence on insurance company fees for revenues combined with the critical role that ratings play in insurance sales and advertising, some insurers, agents, brokers and/or insurance consultants view “voluntary” ratings as less credible due to possible conflicts of interest into the rating process (See U.S. Government Accounting Office (GAO) Insurance Ratings: Comparison of Private Agency Ratings for Life/Health Insurers – while somewhat dated, certain findings may again have relevance given recent criticism of certain ratings agencies).

For these reasons, THEInsuranceAdvisor.COM considers all available ratings from all ratings agencies when determining the financial strength and claims-paying ability ranking that is factored into the TIA Star Rating for overall suitability of a particular product. In this way, the relevance of a rating's change by a single ratings service is less a matter of that downgrade/watch-list and more a matter of how such ratings change relates to the ratings of all other insurance companies. Also under this approach, if one ratings service makes a “mistake” for whatever reason in the derivation of a particular rating of a particular insurer, then that “mistake” is "diluted" or "diversified" by the other presumably "correct" ratings (under the presumption that even if more than one rating agency was to make a "mistake", it would be highly unlikely that they would all make the exact same mistake and come up with the same "incorrect" rating).

THEInsuranceAdvisor.COM CPE research reports, therefore, consider the overall financial strength and claims-paying ability ranking of the insurer for the product that is the subject of the research report based on all ratings services, and assigns a full star in the TIA Star Rating system to those insurers ranked in the top decile (top-10%), a 1/2 star to those insurers ranked the top quartile (top-25%), and no star for those insurers ranked even lower. For more information about the actual ratings from the ratings services of any of the insurers listed below, either contact an agent, broker or company representative of that insurer, or request a Confidential Policy Evaluator (CPE) Research Report which includes both the actual ratings and essential information beyond just financial strength and claims-paying ability that addresses the overall suitability of any given life insurance product based on all 5 major factors of suitability.

^*http://itsamoneything.com/money/2009/03/tax-month-begins-april-fools-day-ends.html