Lessons for Policyholder : US scenario

Posted by Kris | Monday, September 22, 2008 | | 0 comments »

Lessons for policyholders

Consider spreading out annuities, assess other options

SAN FRANCISCO (MarketWatch) -- Whether you have insurance policies through AIG or another company, the events of last week should serve as a red flag about the safety of your annuities and life insurance policies in these volatile economic times.

Keep in mind that even AIG policyholders don't need to panic, experts say. For one thing, while the holding company is in financial distress, AIG's (AIG) insurance subsidiaries are separate entities that are financially sound, regulators and others say.

Also, if an insurance company were to fail, each state runs an insurance guaranty association to protect policyholders. Insurers ante up fees to ensure customers of failed firms are protected. Still, those state guarantees are limited -- that potentially could mean problems for some people with high-value policies if an insurer becomes insolvent.

Here's one way to stay safe: Split up your annuities among different firms, as the state limits apply by company, said David Babbel, a professor of insurance and finance at the Wharton School of Business and a senior advisor to CRA International, a consulting firm.

"If I had 10 annuities with the same company, I would only be insured up to one limit," Babbel said. "But if I have the same number of annuities with 10 different companies, I'm protected in two ways. First, I have 10 times the amount of coverage [from state guarantees] and, second, it's unlikely that all 10 will go under."

For fixed annuities, in general states cover up to $100,000, though some guarantee $300,000 or more. Variable annuities are investment products, so generally your money is not guaranteed by the insurer's assets and not covered by state associations, though the portion of a contract that promises a payout from the insurer might be covered.

Know your options

Policyholders should assess their options, said Melissa Gannon, vice president of insurance and bank ratings with The Street.com Ratings. "Know what your alternatives are," she said.

That includes finding out whether you're fully protected by those state guarantees.

Life-insurance policyholders are covered for at least $100,000 in cash surrender or withdrawal value and at least $300,000 ($250,000 in California) in death benefits, said Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations in Herndon, Va.

But some states provide higher protection, up to as much as $500,000. To get the specific coverage amount in your state, contact your state insurance department or look up your state's rules on Nolhga's Web site. See the Web site.

If the value of your annuity or life-insurance policy exceeds the state limits, weigh your options. Talk to your insurance broker about possible surrender charges or other penalties for exiting your policy or annuity, and determine the cost of purchasing similar products elsewhere, and possibly spreading your policies across more than one insurer.

But remember: Even consumers with policies worth more than their state's guaranteed limit may have nothing to worry about given that these insurers are solvent.

AIG's insurance subsidiaries "did not receive a bailout; they are financially solvent," said Sandy Praeger, president of the National Association of Insurance Commissioners, in a press release.

She added, in an email interview, that "state insurance laws regulate the AIG subsidiaries to assure that the assets are preserved to protect the interests of policyholders."

Gannon said she is reviewing each of AIG's 71 insurance subsidiaries and thus far finds them to be sound. "They are strong companies. They have the money to pay their claims. Some are suffering a little bit from the mortgage-backed securities crisis ... but they are well-capitalized and seem to have enough capital to withstand that. I wouldn't see any of the regulators taking over individual companies," Gannon said.

In the event of a failure

For policyholders within their state's limits, if a company fails "there is a very good chance that your policy will be transferred [to a different insurer] and you'll never miss a beat," Gallanis said.

Usually a failed insurer's business is taken over by another company in what can be a seamless transition for policyholders, he said. "Typically the new insurer will provide all of the protection that would have been provided under the old policy," Gallanis said.

That's in large part because insurers' reserves are tightly regulated, so insolvent companies often still have plenty of assets on hand to cover policyholders completely -- even those whose policies exceed the state guarantees.

But it is possible in some situations that people with life-insurance policies worth more than the state limits may find they're on the hook for a higher premium or a reduced death benefit, Gallanis said.

Similarly, it's possible an annuities contract might be modified by an acquiring company; for instance, if the promised interest rate is deemed too high. But that's a rare event, requires approval by regulators, and is much likelier when an insurance company's failure is rooted in its policy-writing practices. And AIG is not suffering due to the performance of its insurance firms, but rather investment decisions made by the holding company.

There are similar state guaranty associations protecting consumers with homeowners and auto-insurance policies.

If you have a claim filed with a company that then fails, "the guaranty fund steps into the shoes of the insurance company from a claims-paying perspective," said Roger Schmelzer, chief executive of the National Conference of Insurance Guaranty Funds in Indianapolis. Most state guaranty associations cover homeowners and auto-policy claims up to $300,000, he said.

If you've prepaid a premium, then that is usually recoverable through the guaranty association, too, said Barb Cox, the group's vice president of legal and regulatory affairs, though the limit may be $10,000 or $25,000.

Meanwhile, if you're simply holding a policy, with no claims in process, then consider shopping around, Schmelzer said.

"There would be a date at which you'd no longer be covered by that company," he said. "You'd go buy another policy someplace else.... The protection there is the marketplace. You've got plenty of choices."