As we have just witnessed, it is a remarkable fact that a financial rating service could rock our domestic and world economy with their singular opinion and consequent rating of U.S.debt instruments. And, if the other legitimate services were to pile on, the result could be devastating. It’s a fragile and unique marketplace.

That threat should lead us to look into certain other financial institutions and begin asking questions before the point of no return. In this case, let’s consider the life insurance sector. Their stability, credit worthiness and ability to pay claims have many of the same criteria as the Fed Treasury, but many more additional and unique watchful categories.

Consider these [in no order] to name a few:

Reserve Capacity (capitalization/ratios/relativity/liquidity/exposure)

Reinsurance (capacity/networks/marketing/demand)

Risk (analysis/transfer/actual/capacity/critical demand)

Underwriting (field/home office/third party services)

Investments (balance/instrument requirements/risk tolerance)

Assets/Liabilities (liquidity/ratio analysis/balance sheet requirements)

Ratings (rating service history/analysis factors/industry fidelity)

Capitalization (critical ingredient/minimal requirements/trend analysis)

Distribution (markets/channels/intermediaries/trends/technology)

Products/Services (comprehensive/niches/pricing/competition/others)

Lapse Rates (industry averages/acceptable limits/weight considerations)

Management (team/execution/leadership/experience/successes-failures)

Plans/Commitments (Mission/vision/values/tangible words-numbers)

Stock vs. Mutual (stockholder-policyholder/requirements/public/private)

In all, there are a zillion moving checkpoints and categories. Because of the time demands, it would be an asset to be able to rely on the various rating services considering all the complexities. What is unusual to this industry is how the rating services and notable experts differ.

As an example, Fitch, Weiss, Belth and others differ widely with their opinions and reports. While it’s true that some are relatively new and self appointed, others are more newsletter, editorial and investigative in delivery.

What is also unique to the financial services industry is the peculiarity of the rating services, namely A.M. Best. While we were all biting our nails over the AAA rating of the Fed debt (via S&P, Moody’s, etc), A.M. Best does not even have an AAA category. Their highest rating is A++. This tends to create even more confusion to the insurance consuming marketplace. Additionally, all the above categories are given differing weights depending on the rating service you choose. A.M. Best tends to examine the insurance companies more specifically (per the above list) than S&P or Moody’s.

Point is, as we progress into even more uncertainty, especially considering the opportunity for misinformation; maybe the best alternative is to construct your own ratings provider average. Consider this, take away the labels and letters and convert the ratings to a parallel number system…say 1-10. Keep everyone within the same formula even if they are newsletter authors.

Yes, there is some margin for error, but this can become a much simpler evaluation system. The key here (as a consumer, agent or affected other) is to have a decisioning system that is simple and one you can control and at least spot the trend lines. If your company is posting primarily red flags across the board, it may be time for serious evaluation, especially if you have a large investment at stake. Remember, insurance companies are not protected with FDIC insurance for individuals like banks.

ZDT Author’s Comment:

It is ironic that companies peddling life insurance may well be in need of life (support) insurance to stay in the game. The key is that you do not want to outlive your insurance company. It may be worth your time to analyze through due diligence and a hard dash of common sense… and consider a move (if necessary) if you are insurable?

As always…you decide (while you can).  

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