Life insurance and annuities are unique in that they represent an intangible promise made by an insurance company to meet some potential financial obligation often long in the future — a promise predicated on an insurance company’s financial ability and willingness to make good on that obligation.
Every day, insurance producers sell this intangible promise to individuals and businesses. These producers depend, in part, on public ratings, the assurances of insurance company representatives and the branding prowess of these insurers to help determine which companies are a “safe bet.” But does anyone really know if an insurance company will be able to make good on its promises 10, 20 or even 30 years in the future? The answer is no.
Still, insurance producers must sell — and insureds must buy — if insureds are to gain the critical financial protections that only life insurance industry products can provide. So how does an insurance buyer ultimately choose an insurer if the future is, by its very nature, unknowable?
The Problem With Ratings/Comdex
In our experience, most insurance salespeople default to ratings or Comdex scores, which are driven entirely by the ratings, to provide some sense of an insurance company’s financial position at the point of sale. But there is a significant problem here: rating agencies evaluate an insurance company based mainly on the implicit support of a large, often publicly traded, parent.
The rationale for this is that if the insurance company legally responsible to pay an insurance claim gets into financial trouble, the parent company will bail it out — although the parent company has no obligation to do so. And maybe it will, if only to preserve the group’s reputation. But what if the parent company itself is under financial duress or, as is more common, what if the insurance company in question is no longer owned by the parent company?
Despite its reputation as a staid industry, the U.S. life insurance industry has experienced consistent ownership change over the years. In fact, over the past decade we have witnessed an acceleration of ownership changes, and we can no longer assume — as we once did — that insurers with well-branded, large company parents are “safe bets.”
In the past six years alone, the U.S. life insurance industry has seen prominent groups such as Sun Life, Hartford, ING/Voya, Allstate, Aviva, MetLife and AXA spin off retail life insurance and annuity operations. As would be expected in such cases, the ratings of these insurance units and, hence, the Comdex scores, declined immediately after the announcement of these divestitures, given that the companies lost the implicit backing of these parent organizations. This was in spite of the fact that nothing really changed with the underlying financial profile of the insurers themselves. Other insurers have been sold to private equity or foreign insurance groups, with Japanese firms especially active over the past decade.
Even mutual insurers, once considered among the most conservative consumer choice, have not been immune to this phenomenon of shifting ownership structures. During a brief period in the late 1990s, more than 20 mutual insurers either fully demutualized or shifted to a mutual holding company structure. Of these, more than half experienced a subsequent ownership change.
In summary, because ratings depend so centrally on parent company backing and because the traditional support of large, well-branded financial institutions is weakening, focusing exclusively on ratings is problematic.
A Solution: The ALIRT Way
In its more than 20 years of analyzing life insurance company financial performance for distributors, insurers and asset managers, ALIRT has developed an analytical philosophy that seeks to untangle the riddle of how best to select a partner insurance company — and then track its financial well-being. This philosophy, The ALIRT Way, rests on three basic tenets:
- Concentrate on the financial results of the legal entity underwriting the policy. Every company listed on the declarations page of an insurance policy must issue financial statements to the regulator of its state domicile. These statements outline the financial well-being of the insurer backing the policy, so the insureds know exactly where their insurer “counterparty” stands.
- Oversight must be regular and ongoing. Because no one can predict the future, the financial health of an insurer must be regularly tracked. In this way, if an insurance carrier begins to exhibit financial deterioration, necessary steps may be taken to best protect the policyholder.
- Analysis should be quantifiable and measurable. It is ALIRT’s opinion that ratings are too vague. We believe in presenting quantifiable metrics, embedded within a scoring system that includes relative and absolute benchmarks for easy and accurate measurement.
Good Due Diligence = More Sales
This approach, especially the requirement that it be continuous, may go against the grain of traditional point-of-sale practices, but it can reap huge rewards. In ALIRT’s experience, insurance producers who make the effort to implement a more professional approach to insurance carrier oversight garner the attention of trusted advisors (estate lawyers, CPAs, trust officers, etc.) and their wealthy clients, which can result in more business activity, sales and referrals. This is especially true in this era of growing merger and acquisition activity with the headline risk and ratings dislocations that often ensue.
In addition, at a time when the issue of fiduciary duty has seeped into the collective consciousness of buyers — regardless of the ultimate legal requirements — the ability of individual producers and financial institutions alike to show that they are taking a more disciplined approach to monitoring insurer solvency helps mark them as best-in-class among their peers.
In the end, it’s a question of being reactive versus proactive. You can either wait for the next inevitable divestiture/acquisition and react when clients wring their hands over a subsequent ratings downgrade, or you can adopt a disciplined approach to insurance carrier oversight that will make your clients more comfortable, build your reputation among trusted advisors and ultimately put you in the driver’s seat.
To get our most recent life insurance industry review, which evaluates the current state of the life insurance industry and provides detailed financial data for the ALIRT Life Composite, call 833.266.3393 or visit TheALIRTWay.com.