3 - 1 how to determine the right company life insurance company due care process to research...

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How To Determine The Right Company

Life insurance company due care Process to research insurance companies

Assessment of the company’s rating by the major rating services

Evaluation of general characteristics and financial information

Review of recent trends for Profitability

Leverage

Liquidity

Chapter 3Tools & Techniques of Life

Insurance Planning

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Company rating services A.M. Best Company

Rating companies for 85 years

Low fees

Best Insurance review One-year assessment of company’s financial situation

Provide opinions Concerning companies relative financial strength

Company’s ability to meet it’s contractual obligations


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Company rating services (cont'd) A.M. Best Company (cont'd)

Letter ratings A++ to F

Additional modifiers (g) – Group rating (p) – Pooled rating (r) – Reinsured rating (u) – Under review

Not Rated designations NR-1 – Insufficient data NR-2 – Insufficient size or operating experience NR-3 – Rating procedure is inapplicable NR-4 – Company request NR-5- Not formally followed


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Company rating services (cont'd) A.M. Best Company (cont'd)

Financial planers should favor companies that have received at least an A+ rating for a number of years

Financial size rankings FSC1 through FSC XV

Based on capital, surplus and conditional reserve fund

Moody’s Assigns financial strength ratings

Aaa to C

Substantial fee Limited number of carriers agree to be rated


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Company rating services (cont'd) Fitch

Rates the claim paying abilities AAA to D Substantial fee

Standard & Poor’s Rates the claims paying abilities

AAA to R Substantial fee

Quality Solvency Rating Mechanical rating system Based on purely public information

From financial statements filed with the state regulators


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Company rating services (cont'd) Standard & Poor’s (cont'd)

Quality Solvency Rating (cont'd) BBBq – Above average BBq – Average Bq – Below average

Weiss research Relative newcomer to rating services Proprietary rating system Dependant on publicly available information Ratings more severe than those of the other rating services A through F


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Life insurance company due care checklist Company size and age

Large well established companies are likely to weather adverse trends more successfully than smaller and newer, less well –established companies

Company financial information Percentage of premium that is individual life premium

Company could place more emphasis on other lines of business at the expense of the life insurance policyholders

Average policy size Larger polices lapse less frequently than larger policies

Average policy size and company size are not related


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Life insurance company due care checklist (cont'd) Quality of investment assets (cont'd)

Bonds, mortgages, real estate and policy loans Carriers with financial difficulties

Large percentage of junk bonds Large percentage of non-performing real estate or mortgages

Assets are listed by category and investment grade Bond maturities

Shorter average maturities are considered less risky than longer maturities

Investment yields Return on general portfolio principal source for

Dividends for participating policies Interest credited to interest-sensitive policies


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Life insurance company due care checklist (cont'd) Separate accounts

Variable life, variable annuity or variable universal life

By law, assets kept in separate account

Percentage of assets held in these accounts indicate companies view of the importance of these products.

Planners should assess the quality of these assets as they do the other assets Liabilities and payments to surplus indicate charges applied against the funds

Compare separate account net investment income against those of competitors


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Life insurance company due care checklist (cont'd) Company history management and operations

When was company founded? Stock or mutual company? Subsidiary of another company? Recent changes in management? Above-average growth? Stability of growth? How are products are distributed and what is the size of the field force? How does it’s size compare industry wide? Approved for business in the state of New York? Companies most important product line Proportion of business for each line


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Life insurance company due care checklist (cont'd) Operating ratios

Lapse ratio How many policies are lapsing annually Look for lapse ratios less than 11% Greater lapse ratio usually means higher than average expenses for policyholders

All else being equal, better to buy from companies with larger average policies

Operating comments Compare net yield with the industry wide average

Reasons why it is higher or lower than the industry average

Reserves Set asides to pay promised benefits


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Life insurance company due care checklist (cont'd) Operating comments (cont'd)

Statutory Reserves Amount that together with future net premiums and interest will be

sufficient to pay future claims

Measures of expenses Ratio of total expenses to total insurance in force

Comparing insurers who are almost exclusively life insurers

No weight to annuities , health insurance, disability and accidental death benefits

No allowance for difference between first year and renewal expenses

No allowance for differences of book of business by age or plan


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Life insurance company due care checklist (cont'd) Measures of expenses (cont'd)

Ratio of total expenses to premiums received Gives some weight to annuities, health insurance, disability policies, etc More appropriate for companies with broader lines of business

Ratio of total expenses to total income Broadest overall measure Includes weighting for supplemental contracts

Mortality Experience Company that has tough standards desirable

Future favorable mortality experience translates to possible higher dividends or interest credited to cash values

Lower lapse ratios


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Life insurance company due care checklist (cont'd) Dividends

Compare projected performance against that of the actual experience

Business trends New business issued

Management plans for new lines of business

Changes in amounts of insurance inforce

Look for declining trends in expenses

Trends Profitability

Return on equity


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Life insurance company due care checklist (cont'd) Trends (cont'd)

Change in capital and surplus Measure of net worth Excess of assets over liabilities Greater surplus equals less risk of insolvency MSVR

Mandatory Securities Valuation Reserve Reserve for losses on securities held in the general portfolio

Leverage Change in net premiums written Measures whether a companies obligations are growing at a rate that may exceed it’s

ability to handle them


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Life insurance company due care checklist (cont'd) Trends (cont'd)

Insurance exposure to capital and surplus Measure of mortality exposure or mortality leverage

How much adverse mortality experience the company can handle

Liquidity Meeting current and future obligations

Affiliated investments to capital and surplus Applies when company is part of an affiliated group of companies

Considers the investments of all affiliated companies and compares it to the consolidated capital and surplus


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Mutual Companies Versus Stock Companies Mutual company

Corporation with no shareholders

Policyholders are members of the corporation

Membership rights Right to the dividends declared by the board Right to participate in the corporate governance

Election of directors Right to receive any remaining value if the company is liquidated Right to expect the corporation will be run for the benefit of it’s members Right to bring legal action against the directors and officers for violating their

fiduciary duties


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Mutual Companies Versus Stock Companies Stock Company

Corporation with stockholders who may or may not be policyholders Corporation run primarily for the benefit of the stockholders

Advantages and disadvantages Mutual (M) versus Stock(S) companies M - No conflict of interest between shareholder and policyholders M - Lower profit goals than stock companies M - Management can take a longer term view S – Greater flexibility to raise capital M -Financial reporting less flexible because transitions listed on parents books S – My be easier to provide other financial services through it’s subsidiaries S - Management performance subject to higher level of scrutiny


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Reinsurance - why use it? To insure against losses they may incur

Companies have limited amount of capital Cap losses by they incur by purchasing reinsurance The smaller the company, they more reinsurance they will buy

To seek the reinsurer’s underwriting and expertise

To seek help to enter or exit given lines of business or product lines Company’s wanting to exit a line of business can reinsure the entire line Company’s wanting to offer a new product or line can obtain the help of the reinsurer to

underwrite and develop the product until the company develops it’s own expertise

To help a company manage it’s financial position May increase the ceding company’s statutory earnings and surplus during the year paid


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Reinsurance (cont'd) Proportional reinsurance

Reinsurer takes share of losses incurred

Categories of reinsurance arrangements YRT

Ceding company transfers mortality risk but retains responsibility for establishing reserves

Coinsurance V Transfers a proportionate share of all policy risks and cash flows Relieves strain on surplus

Coinsurance with funds withheld Ceding company keeps premiums normally paid to reinsurer Reinsurer keeps allowanced normally paid Limits cash flow between companies


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Reinsurance (cont'd) Non-proportional reinsurance

Only pays if loss exceeds a certain amount

Risk is allocated by amount

Categories Stop Loss

Covers ceding companies claims above a predetermined dollar amount

Catastrophe Covers losses exceeding a specified amount or number of insured’s due to a

single event (e.g., airplane crash, train wreck or natural disaster)

Excess of Loss Reinsurance above a certain dollar amount for a particular claim


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Federal and State Laws and Regulation Purpose of regulation

Maintain insurer’s financial solvency and soundness

Maintain fair treatment of current and prospective policyholders

Insurance carriers regulated by the individual states Division of insurance

Investigate claims of unfair trade practices Reviewing and approving policy forms used by insurance companies Approving rates charged for various types of insurance Ensure compliance with state laws that regulate insurance rates


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Federal and State Laws and Regulation Insurance carriers regulated by the individual states (cont'd)

States assume primary responsibility for overseeing financial operations and management of companies incorporated in their states

National Association of Insurance Commissioners(NAIC) Coordinates the regulatory processes of the states

Suggests model laws state legislatures can enact

Underwriting Determines whether or not to issue a policy and at what price


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Underwriting (cont'd) Factors used in determining offer

Age Sex Height and weight Health history (including family) Purpose of insurance Marital status and number of children Amount of insurance inforce and applied for Occupation Income Credit history Tobacco and alcohol use Foreign travel Hobbies


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Underwriting (cont'd) Physical exam

Medical records

Blood and urine samples

Medical Information Bureau (MIB)

Classifying the risk Impacts the price of the coverage

Preferred, standard, table rating (as examples)

One companies rating is not necessarily what another company would rate


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Company service and fairness to policyholders Service is difficult to quantify

Considerations Turnaround time for requests for information, policy loans, application processing, death

claims

Level of service provided by the agent

Do policyholders share equitably in the company’s favorable performance

Do policyholders of one class of policies share equitably as compared to other shareholders of other types of policies

Compare projected dividends against those actually paid


Insurance Planning

3 - 1 how to determine the right company life insurance company due care process to research...

Documents

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rating procedure

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company requestnr

insufficient size

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