- The Washington Times - Thursday, March 5, 2009

Is my policy safe?

Probably. But there’s good reason for consumers to keep an eye on their insurers’ financial standing.

Life insurers lost billions of dollars during the last three months of 2008. Prudential Financial Inc., Hartford Financial Services Group Inc., Principal Financial Group Inc., Lincoln National Corp., and Conseco Inc. all saw their cash cushions shrink amid the stock market’s turmoil. Their stocks have plunged by more than half since Jan. 1.

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If the markets and economy keep deteriorating, analysts say, life insurers’ troubles could escalate to the point where they require billions in federal money.

Insurance has traditionally been among the most stable of industries, and the concern is that a major breakdown could deplete state-run funds for repaying policy holders and further trample an already devastated economy.

“The question is,” said Israel Lustig, CEO of Intergenerational Wealth Preservation, “will we have a tsunami, a perfect storm, that nobody really reserved for?”

Lustig said some of his clients have called, asking if they should switch their insurers. John Smith, president of Hubble-Smith Insurance Agency in Columbus, Ohio, has gotten calls, too.”We’ve got a lot of people concerned,” Smith said.

The troubles of insurance companies are nowhere near those of the banks. No company specializing in life insurance has collapsed during the current financial crisis, unless you count American International Group Inc. The problems at AIG, a financial services conglomerate, resulted not from its traditional insurance business, but from its investment banking and risky bond insurance. The company has gotten $180 billion in government funding, with officials calling the company too systemically important to fail.

But regulators and agents alike are warning policy holders not to panic.

Much like bank deposits, insurance policies have a lot of protection. When an insurer goes under, policy holders are the first to get paid back, while shareholders get wiped out.

And cashing out would be an expensive, risky undertaking for most people anyway — especially if a policy holder is older, overweight, a smoker, or all three. These folks might not be able to get insured anywhere else.

There are several types of life insurance policies. Most fall under two categories: term life and whole life. Term life is the cheapest, and only offers death benefits — if a policy holder dies before the term ends, his or her family gets the money. Whole life, on the other hand, puts some of the payments into a savings account. Whole life is more popular, but term life still has a significant following, according to Insurance Information Institute data.

As the last six months have proved, the economy and financial services industry are in uncharted territory, so it’s wise for consumers to check and see if their policies are with strong companies. If an individual policy is worth more than the limit a particular state will repay in the event of a collapse, the holder might want to consider moving some of it out or switching altogether, Lustig said.

“What will happen in the future? We don’t know. Would we recommend that clients move to higher ground? Yes, if there are no big surrender charges,” he said, referring to the penalties some policy holders pay for terminating their agreements with insurers.

Unlike banks, insurers are regulated at the state level. And instead of the Federal Deposit Insurance Corp., insurers have their policies backed by state insurance guarantee associations.

The total amount of money available every year to pay policy holders in states’ insurance guaranty funds is $8.8 billion, according to the National Organization of Life & Health Insurance Guaranty Associations.

Normally, that’s plenty. No state’s insurance guaranty fund has ever been wiped out, NOLHGA says. Robert Sevigny, President of the National Association of Insurance Commissioners, said insurer insolvencies are “infrequent,” and when one does occur, another insurance company usually comes in and takes over the insolvent insurer’s policies. That would likely happen, too, should an insurer fail in the current environment, regulators and industry analysts said.

The problem, though, would be if a bunch of insurers were pushed to the brink of failure at the same time ? something that’s never happened before. There are trillions of dollars worth of policies out there.

“The guaranty funds could fail,” said J. Robert Hunter, a former Texas State Insurance Commissioner who is now director of insurance at the Consumer Federation of America. Most life insurers are still in decent shape, he said, but if a couple of big companies went under at the same time, “the guarantee funds would be overwhelmed.”

The biggest problem facing insurers right now is the financial markets.

The 55 percent drop in the Standard & Poor’s 500 index from its 2007 record and persistent volatility in the credit markets are shrinking insurers’ investment portfolios and forcing many to dip into reserves to pay obligations to holders of annuities. Annuities are contracts that give customers regular, risk-free retirement income.

But ratings agencies have been downgrading a huge number of other insurers, too, leading shareholders to cash out.

“There’s definitely a lot of risk in some of the life insurance firms out there,” said Donn Vickrey, co-founder of research firm Gradient Analytics.Donald Light, a senior analyst at the research firm Celent, is “cautiously optimistic” there will not be a major failure. But “is it possible? Yes,” he said.

State regulators have been doggedly checking insurers’ capital levels since well before the crisis began, said Sevigny, who is also the insurance commissioner of New Hampshire. He said he does not know of any insurers with operational problems ? including AIG’s life insurance subsidiaries.

But, he added, he didn’t want to mislead consumers and say failure is impossible.

“No one is immune from what goes on in the economy,” Sevigny said. “As well-regulated as I believe the insurance industry is, that does not make it immune to what’s going on in the economy.”

He said no company has told the NAIC it needs government funding. But he added that some insurers with banking operations have gotten funding through the Troubled Assets Relief Program, and some are looking to buy a bank to get access to additional capital.

Each state has its own procedure should a life insurer go belly up. But most state guaranty associations provide at least $300,000 in life insurance death benefits, according to NOLHGA. They also tend to provide at least $100,000 in cash surrender or withdrawal values for life insurance and $100,000 in withdrawal and cash value for annuities.

There are a few precedents where annuity contract holders had to take haircuts. It happened, for example, when the insurer Executive Life went under in 1991.

For worried consumers, “you have to weigh the probability of a company being in real trouble versus the penalty,” Hunter said. “For most people, the decision will be leave the money where it is.”

There are many variables holders need to consider: How old are they? How close are they to retiring? How far over the guaranty limit are they? And what type of policies do they have?

And policy holders should make sure their agents are trustworthy, too. Keep in mind, a flip to another policy usually means a commission for the agent, said Byron Udell, CEO of life insurance brokerage firm AccuQuote.

“Some agents are preying on the angst that people are expressing,” Udell said. “It’s time for everybody to be prudent and do their own research.”

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