Wednesday, April 22, 2009

Consumers Do Have Protections

Following up on yesterday’s post which chronicled the exchange between state insurance regulators and Allstate CEO Tom Wilson, here is something that consumers should consider before they lose heart with the current system of oversight.

The following is an article which I wrote on April 16 for, a joint IAC/Dow Jones venture. It suggests that the current system offers many protections for consumers.

When once mighty American International Group stumbled last September, the financial system wasn’t the only thing that was shaken. Daily blow-by-blow news accounts of the giant financial services company’s troubles also cast doubt over the soundness of insurers.
But choosing an insurance company to protect you doesn’t need to be a source of worry if consumers make a couple of mental notes to self and complete a few simple homework assignments.
The first and most important thing to keep in mind is that there is a safety net if financial disaster strikes a company, according to Jim Mumford, first deputy commissioner with the Iowa insurance department. “State guaranty funds offer the most comfort. Having that safety net is the most important thing. That is the ultimate security.”
Individual states have their own guaranty funds and guaranty fund limits. Links to these states’ Web sites can be found at, the Web site for the National Organization of Life & Health Guaranty Associations, Herndon, Va. The guaranty funds provide a backstop, offering protection and underscoring the solvency oversight that is part of insurance regulation, says Peter Gallanis, NOLGHA’s president.
Mumford notes that AIG’s insurance operations were safe and solvent and that it was a financial unit that destabilized the company.
And, he adds, the National Association of Insurance Commissioners, Kansas City, Mo., has just voted to increase guaranty fund limits. That recommendation will now go before state legislatures. While the increases might take a year or two to put into law depending on the state, some states including Iowa, have already implemented the changes, Mumford explains. The new recommended limits are $250,000 for individual annuities, up from $100,000; and $300,000 for long term care contracts, up from $150,000. Protection for life insurance contracts remains at $300,000 for death benefits and $100,000 for the cash value in the contract.
Now get ready for the homework assignment. The easiest way to find out if the company that you’re considering is financially strong is to check with rating agencies including Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Corp. All three offer agencies offer free access to their ratings.
Another item on the financial strength checklist, according to Birny Birnbaum, a consumer advocate with the Center for Economic Justice, Austin, Texas., is to check and see which companies are seeking federal assistance through new government programs such as the TARP, more formally known as the Troubled Asset Relief Program.
And, if a consumer is using an agent, it is also worth checking to see how that producer is being compensated, says Birnbaum. For instance, some producers are compensated on a volume-based formula, he continues. The more policies sold, the greater the commission, he says. So, it is important to independently check to make sure that a company that is being recommended is strong.
In addition to ratings, the NAIC Web site has a consumer information source available at that provides financial information on companies.

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