Buying Insurance, Part I–Getting Sound Protection after the Financial Crisis

As I have mentioned in prior posts, the insurance industry appears to be safe and sound.  See our prior post here.  The crisis on Wall Street does not appear to have affected the solvency of the U.S. insurance industry.

However, in the wake of the Wall Street crisis, a consumer should be prepared to ask questions when either buying insurance or renewing an existing policy. 

The reason why consumers should exercise some caution is that an insurance policy is only as good as the insurance company’s ability to pay claims in the future.  In essence, insurance is a contingency contract where the insurance company may be obligated to pay a claim in the future.  Therefore, you have to make sure that an insurance company is safe and sound and will be able to pay claims.

On a positive note, consumers have been protected very well by the individual insurance departments of the fifty states.  Insurance is regulated by the individual states and not by the federal government.  We can be thankful for this since the federal government did a miserable job in its non-regulation of banking, mortgages, Freddie Mac, and Fannie Mae.  

Here are some things to look for when shopping for insurance:

  1. Buy insurance from an “admitted” carrier.  An insurance carrier “admitted” to write in the state is licensed by the state.  That means that the insurer is in compliance with the state’s requirements of liquidity and reserving for the protection of policyholders and the payment of  claims.  Insurance companies licensed in New York have undergone rigorous examination and audit by the State Insurance Department.  Furthermore, an added feature of using an admitted carrier is that in the event of the insurance company’s insolvency, the state will take-over the insurance company’s obligations.  In that event, a New York policyholder will have up to $1,000,000 in liability protection on a pending claim.  Policyholders will also be protected on pending first-party property claims.  This protection, offered by the New York State Insurance Department’s Liquidation Bureau,  is the equivalent of Federal Deposity Insurance offered by the banks.  However, this protection is not offered to insurance companies which are not licensed in the state.  You can check the New York State Insurance Department’s website to make sure that your prospective insurance carrier is licensed in your state.
  2. Only buy insurance from a “non-admitted” carrier if you cannot get reasonable insurance from an “admitted” company.  Sometimes a business cannot obtain insurance from an admitted carrier, and it has to buy insurance from a “non-admitted” company, i.e., a company which is not licensed in New York.  This can occur when a business has had a poor claims history.  It can also occur when a business is a member of a high risk industry (such as asbestos removal).  In such case either the market has tightened due to underwriting and claims and other conditions or insurance through a New York company would be cost prohibitive.  In that event, going to a non-admitted carrier is the only viable alternative to a business.  In that event a business owner should not despair because the mere fact that an insurance company is non-admitted (or part of the “excess and surplus” market in insurance industry parlance), this does not mean that you are buying substandard insurance.  Indeed, many sound and reliable insurance companies are not licensed in New York because they do not want to be subject to the stringent regulatory requirements of the state, and they seek a little more flexibility with their finances.  Also, some non-admitted insurance companies are smaller than the big insurers, such as Allstate, therefore, they cannot afford regulatory compliance in the fifty states.   However, if you go to a non-admitted carrier you must make sure that the insurance company is in sound financial condition.  You have to do some research, such as check on the company’s history finances as well as ratings from insurance rating services, such as A.M. Best.  
  3. Buy from an insurance company with a rating of least “A.”  Your insurance company should have a rating of at least “A” from A.M. Best.  A rating is no guarantee in this brave new world of finance, however, it is a good indication of solvency.  This applies to both admitted and non-admitted carriers.
  4. Buy your insurance from a reputable independent agent.  The foregoing issues can be discussed with an independent agent who can advise you as to your insurance needs and the solvency and reliability of an insurance company.  An independent agent can offer different insurance companies for your consideration.

Mark E. Seitelman, 10/1/08,


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