Will Your Insurance Hold Up in a Storm?
from
May/June 2006
by Carol Vinzant
The best policy ever written could turn out to be worthless
if the insurance company itself collapses. This isn’t a far-fetched
nightmare. Some widely known names in the business have ended up in
liquidation over the years, among them the American Mutual, Home, Ideal
Mutual, Integrity, Midland, Mission, and Reliance insurance companies.
Reliance, a property and casualty insurer once headed by financier Saul Steinberg, was the largest. It collapsed in 2001, leaving $3.2 billion in unpaid claims. So far regulators in Pennsylvania, where Reliance was based, have recovered less than $100 million on behalf of policyholders. They’re also still suing Reliance’s former auditor, Deloitte & Touche, claiming that Deloitte told regulators Reliance was fine while warning off Wall Street clients. Deloitte calls the allegations false. “The suit is an effort to exploit the current environment by seeking to shift blame for a business and regulatory failure,” says a spokeswoman.
Insurance-company crashes, though rare, happen more than you might think. A study by A.M. Best, an insurance-industry ratings agency, found that about one in 120 property and casualty insurers failed from 1969 through 2004; 2005 saw a marked improvement, with an estimated one in 286 going belly-up.
Not surprisingly, the study discovered that the safer companies were bigger or older. But even that rule of thumb is wobbly. Some 22% of the failures since 2003 have been at companies at least 90 years old, compared with 8% previously. One reason people felt secure with Reliance was that it had been founded in 1817.
San Francisco consultant Richard Stewart, a former New York State insurance superintendent who has been studying insurance failures for decades, puts much of the blame for collapses on an overcrowded market that pressures insurers to underprice policies. He also argues that the failure rate might be higher if it weren’t for regulators who permit troubled insurers to stay in business too long. His latest report, for 2003, predicts more insolvencies ahead. Katrina and other weather crises may well prove him right.
There are some red flags to watch out for. A troubled insurer will often try to “write itself out of trouble,” as some describe it, by offering coverage at discount prices. So if a premium seems too cheap to be true, it probably is. Another red flag: the absence of a rating by Best, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, or any of the other ratings agencies. If an insurance company offering coverage has not been rated, find out why before you buy a policy.
Insurers may offer discounted rates if your company follows certain safety procedures. You can hire an independent risk consultant to visit a facility and tell you what to do to save on premiums. Insurance Claims Consultants in Wichita, Kansas, is one of many outfits that do this. Not every client follows the firm’s recommendations, says Dan Martinez, its CEO. Some opt just to pay the higher rates as the cost-effective way to go. Some do nothing, hoping the insurance company won’t hike their premiums.
