3 - 1 how to determine the right company life insurance company due care process to research...
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3 - 1
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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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How To Determine The Right Company
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
Chapter 3Tools & Techniques of Life
Insurance Planning
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