Is My Insurance Company ‘A-Rated’?

I just got a question from a prospective client about what the financial rating is for the companies we have used to quote coverage for the home they are buying. The answer is not so simple, so I thought this would be another good subject for a post.

A lot goes into a carrier’s financial rating, but mostly it’s about analyzing their ability to pay claims, and the biggest issue there for us on Long Island, and particularly on the South Shore, is catastrophic windstorm. This can be a hurricane or just high winds. But the problem is that it affects MANY homes rather than just one or two. Virtually all insurance companies can easily pay for one or two homes that, for instance, burn completely to the ground. But the idea that a windstorm could damage THOUSANDS of homes in the same area at the same time could bankrupt an insurance carrier who is not that stable.

Since the financial meltdown of 2008, AM Best (www.ambest.com ), the oldest and most respected rating company, has gotten much more conservative in their ratings. This is due to a number of factors. For one, the accounting mumbo jumbo that led to a lot of losses in the meltdown, was hidden even from the rating companies. For another, global climate change is drastically changing the exposures near the coast. So companies who write homes near the water have a much tougher time getting that coveted A rating.

In the meantime, most of the biggest traditional insurance companies (Travelers, Allstate, Hartford, State Farm, etc) have pulled back 2-3 miles from water in what they write. So the negative impact of waterfront and coastal property on their financial rating gets greatly reduced, as opposed to other, mostly smaller, companies who are finding ways to take on this risk.

Another ratings agency has sprouted up called DEMOTECH. (www.demotech.com) also gives financial ratings. One thing you will hear from insurance reps is that there are a couple of companies out there who are rated A by Demotech. But in many cases THESE COMPANIES ARE NOT EVEN RATED BY AM BEST! Others have an A rating from Demotech but B or B+ from AM Best.

The reason is fairly straightforward. A lot of the investment capital, and reserve funding that the Demotech A rated companies use to back up claims payments comes from promissory notes from private investors such as billionaire George Soros and others. These investors have been chasing returns that are higher than the 1 or 2 % you can get on bank accounts and bonds these days, and have turned to complex insurance investments. Demotech counts these ‘promissory notes’ as if the insurance company already has the money. AM Best does NOT count these and so may assign a lower rating to a particular company. But again, many of the companies rated A by Demotech are not rated AT ALL by AM Best, and are not even eligible to be looked at by them.

The final point to make is that if the insurance carrier is admitted in the state of New York, coverage is also backed by the New York State Insurance Guarantee Fund. This is comforting, but after seeing what happened with NY Rising, relying on the state government could be frustrating. You might get paid by them eventually but it would probably take several years, which could be a big problem.

Bottom line? Deal with someone you trust, and ask questions and research a little yourself so you know what questions to ask.

Visit us at www.nortonandsiegel.com for more info.

Recent Changes in New York Insurance

It’s been a while but the insurance marketplace has been quiet. Still, there are a couple of new items to report.

Across New York state, a law was passed a while back making it illegal to be using anything other than a hands-free phone while driving. I don’t know how it is in the rest of N.Y. but here on Long Island it seems that almost half of the drivers going by my office every day are on a hand-held phone. But now the law has been given more teeth. As of yesterday, a cel phone violation will now add two points to your NY driver’s license and motor vehicle record. That means that if you get a couple of other tickets, a cel phone violation could be the difference that causes your license to be suspended (for accumulating more than 11 points in an 18 month period). Insurance companies will also be more likely to charge for cel phone violations now, although New York car insurance companies use a different point system.

Research has shown that driving while talking on a hand held phone gives you about the same chance of having an accident as driving while under the influence of alcohol. So this is a real issue. Of course, so are other distractions such as applying makeup, texting (possibly the worst) or reading the paper while drinking coffee. The bottom line is that when you get behind the wheel you are now in a potentially deadly weapon, and we all need to be more careful.

Meanwhile in the Long Island homeowners insurance market, if anything it has eased up a little, though the larger carriers continue to cancel and non-renew some homeowners policies, especially along the south shore in Suffolk County. But some new, smaller insurance carriers have come into the market, and competition has caused some pricing to drop. So if you had to buy expensive homeowners insurance because you were canceled or you bought your waterfront home in the past couple of years, you might want to contact your agent to see if he or she can shop around for you a little.

NY Auto and Home Insurance in the Financial Crisis

Greetings, all. Like most small businesspeople these days I have been very busy trying to make sure I do those things necessary to keep our office busy and profitable in tough economic times. So I thought this would be a good time to talk about how the financial crisis is affecting the insurance companies.

We have all been reading about the failure of many Wall Street firms and banks. Some even have divisions in the insurance business such as AIG whose a widely publicized problems have many people worried because of their insurance policies with various parts of that group. However while banks and brokerage firms were de-regulated a number of years ago which is part of the reason for the current mess, the same is not true of the insurance business.

Insurance is one of the most heavily regulated businesses and New York in particular is considered the model for other states and around the world in keeping New York insurance companies solvent and able to pay their claims. Even in AIG, it is the parent holding company not the insurance units that are having problems.

As long as you were insured with a New York licensed insurance company you would have nothing to worry about in terms of whether claim would be paid up to $1 million, which is a guarantee that is part of the New York State insurance guaranty fund. And if you are one of those people on Long Island who have coastal or waterfront property and have been forced to get your insurance with an unlicensed carrier such as Lloyds of London or any number of other carriers out there, you are probably even safer because these companies have been managed for the long-term as opposed to the short-term money making goals of some of the big American financial companies which is what caused them to get in trouble.

One of my biggest fears about the insurance industry is that up until recently, there was a lot of talk about deregulation for insurance. What we have seen in this financial crisis is that deregulation leads to sacrifice of long-term viability in favor of short-term profits. That might be fine if you are talking about selling TV sets, but insurance simply must be based on a longer-term perspective including reserves for catastrophes that might only happen every 50 years. If we allowed the same sort of short-term thinking that led the large brokerage houses to package up toxic loans and sell them to people and then run with their commissions, we could easily cause a similar disaster in the insurance business by allowing people to suck out this money instead of putting part of it away for long term catastrophe management.

What we are seeing is a huge drop in value of all stocks in the financial sector based on the problems of the banks and brokerage houses. There really is not much reason for this in the insurance industry but there are probably some great bargains to be had on their stocks right now because they have been trampled with the rest of the sector.

But for the average person just wondering if they would get paid if they needed to put in a claim on their flood insurance or homeowners insurance (or car insurance for that matter) then the answer is that in general there should be nothing to worry about and the vast majority of insurance companies have plenty of money to pay claims. What we will most likely see is some consolidation of companies who do have very strong balance sheets who will be out there looking for other companies they can buy at bargain prices.