Life Insurance Company Evaluations

An evaluation of any insurance company begins with an analysis of its financial stability because the long-term nature of its obligation to the policy holder: I he most critical factor in making this determination is the adequacy of its surplus. For this purpose the term “surplus” is defined as the excess of the insurer’s assets over its liabilities. In judging the validity of the surplus figure, however, it is necessary to look to the quality of the assets the insurer holds. This is because of the varying degrees of risk that are associated with different classes of assets and between assets of the same class. (For example corporate “junk bonds” cannot compare in degree of risk with bonds issued by the U.S Treasury.) Further, the profitability of a company is crucial to its ability to meet future obligations. 

Sources of information for making the above evaluations and then comparing companies are similar to those previously mentioned for determining an insurer’s past performance, i.e., the government and trade associations. The effective gathering, assimilation and accurate interpretation of such information is, however, a task more often better left to specialists such as the five rating agencies that focus on insurers (Standard & Poor, Duff & Phelps, A. M. Best, Moody and Weiss). Each agency has a schedule of ratings that are kept current and readily provide an idea of an insurer’s financial standing. The ratings from one agency to another are not perfectly comparable, however, since each has its own grading system using alphabetical letters and not all insurers are graded by all five agencies. Further, the subjective nature of the evaluation process results in insurers receiving different valuations from the various agencies. In any case, the ratings are a reasonably reliable, valuable and a convenient source of information on a complex subject that should not be overlooked. Generally, information on a company’s ratings and related reports can be obtained from the insurer’s agents and customer service operations as well as the rating agencies’ own web sites on the Internet.