Are Insurance Companies Safe?
By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor
They have been called the debt managers of the world. But just how solvent and safe are insurance companies?
Shortly after The Great Recession began unraveling in 2008, many people feared insurance companies would suffer the same fate as investment banks like Lehman Brothers, Bear Sterns, Wachovia and Washington Mutual. After all, no one could have predicted those banks would fail, either. Apart from those old enough to remember The Great Depression, people had never experienced such a far-reaching financial downturn.
As Time Magazine pointed out with a story in October of that year, insurance companies operate differently than banks. For one, they are tightly regulated and they are regularly audited. The National Association of Insurance Commissioners assists state insurance regulators in, according to the agency’s website, protecting consumers and ensuring “fair, competitive, and healthy insurance markets.” The agency began in 1871, and for the last 150 years, has assisted the public interest by providing oversight of the insurance industry.
Regulations require insurance companies to contribute to state funds that protect policy holders, as well as to maintain large sums of cash and short-term investments at all times. With longer-term investments, insurance companies cannot take the same kind of risks that banks can. As Time reported in 2008, insurance companies on the whole placed only about 10 percent of their investments in real estate and mortgages, risk categories that inflicted significant losses to banks that were more heavily invested in them. The one insurance company that required a bailout, AIG, suffered its heaviest losses from its financial services division, a business segment that most insurance companies do not have. Its insurance division remained solvent and protected.
While the AIG case was an outlier, it still raised legitimate red flags among the general public. And the truth is that there have been many instances of smaller insurance companies fading into oblivion. What would happen if a large insurance institution like AIG failed?
As Time wrote in 2008 about such a possibility, “Even if a company were to fail outright, consumers are protected much in the way that routine bank deposits are guaranteed by the FDIC.”
Safeguarding against a potential failure is the Insurance Guarantee Fund, which every insurance company is legally required to pay into, and which is also managed by state-sanctioned insurance guaranty associations. These associations are charged with protecting policyholders and claimants in the event of solvency issues with insurance companies, and can even step in to take over servicing the policyholders of companies that fail. They are legal entities backed by the insurance commissioner in every U.S. state.
Unlike banks, insurance companies can’t reward executives from reserve revenue or apply it toward the nebulous category of operating expenses. That “excess” money must be legally dedicated to the claims of policyholders. As an added protection for policyholders, a failing insurance company cannot access federal bankruptcy laws to escape liability for its debts.
Of course, no company or individual is immune from financial setbacks or crashes. But then, if that is the reality of the situation, why not use the relative comparative solvency of insurance companies to one’s benefit?
That is exactly what some of the largest corporations in the world have done in recent years. Below are 10 stories that present a trend of corporations transferring the liabilities of their pension plans into the safety of indexed annuities with insurance companies.
Free Guide: High Profile Use of Annuities
Corporations Move Pensions into Annuities with Insurance Firms
1. “GM Unloads $26 Billion in White-Collar Pensions; Could Union Workers Be Next?”
Forbes; June 1, 2012
2. “Kimberley-Clark buys annuities to cover pension risks”
Business Insurance; Feb. 23, 2015
3. “Molson Coors transfers $900 million in pension liabilities”
Pensions & Investments; Dec. 4, 2017
4. “DuPont to pump $30 million into pension plans in 2019”
Pensions & Investments; Feb. 12, 2019
5. “Eastman Chemical buys annuity to transfer $110 million in pension liabilities”
Pensions & Investments; Feb. 23, 2021
6. “Centrus Energy kindles annuity deal for $30 million in pension liabilities”
Pensions & Investments; March 19, 2021
7. “FedEx to ship $500 million to pension plans”
Pensions & Investments; July 20, 2021
8. “Lockheed Martin offloads $4.9 billion in pension liabilities”
Pensions & Investments; Aug. 3, 2021
9. “CTS unloads pension liabilities with annuity purchase”
Pensions & Investments; Aug. 4, 2021
10. “Macy’s purchases annuity to transfer $256 million in pension assets”
Pensions & Investments; Sept. 7, 2021
Why would these corporations have taken these actions with billions of their pension dollars, which they’re liable for, if they didn’t believe in the solvency of insurance companies? They have made the determination that, while risk can never be ruled non-existent, it can absolutely be minimized.
This trend is causing ripple effects in the general public, especially among those who are getting closer to retirement age and want to protect their savings from market volatility. The same financial instruments that these corporations are using to shield their pensions from risk with insurance companies—indexed annuities—are sought after by retirees for the protection of their “private pensions,” or retirement savings.
As is the case with the public pensions of corporations, individuals can use indexed annuities to create their own pensions and receive a predetermined monthly income throughout their retirements. It’s the same basic income stream that pensioners receive from corporations who moved pension funds into indexed annuities. Private policyholders of indexed annuities enjoy the same protection from risk as these giant corporations.
There are even ratings agencies that help consumers navigate which insurance firms are generally thought to be the most solvent. As detailed in a story from Forbes last year, “Insurance companies are rated on their financial strength by independent agencies that each have their own rating scale and standards. The five rating agencies are:
1. A.M. Best, which rates companies on a scale of A++ to D-
- Fitch, which rates companies on a scale of AAA to D
3. Kroll Bond Rating Agency, which rates companies on a scale of AAA to D
4. Moody’s, which rates companies on a scale of AAA to C
5. Standard & Poor’s, which rates companies on a scale of AAA to D
The highest ratings are given to companies that the ratings companies believe are in the best positions to meet their financial obligations.”
The Insurance Information Institute is another source of consumer-centric information about the insurance industry. The institute recommends that people reference more than one rating agency in their searches, since ratings can fluctuate from agency to agency. Some insurers will also list their ratings on their websites, though they may not be the most current rating.
Policyholders also have the ability to change insurance companies if they wish, so it’s important to keep updated on any downgraded rating reports. Middle-of-the-pack ratings should not be a cause for concern, but policyholders may want to take proactive steps if their insurance company receives a low-end rating.
Regulators and auditors monitor the insurance industry more than almost any other industry in the world. That’s important. But how does it assist a financial advisor’s practice? For starters, it provides advisors with concrete evidence to explain to their prospects and clients that all risk is not the same. Surprisingly, many people who are invested in the market do not grasp this basic truth.
The stock market is a fantastic tool for investors to realize growth. To think that insurance tools like indexed annuities carry a comparable risk as stocks, as some people errantly believe, is insanity. They are not even remotely equal in risk. In fact, the indexed annuity is a comprehensive risk slayer.
Advisors do themselves a disservice by not letting their prospects and clients know that insurance companies have long been trusted as the most solvent firms in the financial industry; that some of the wealthiest corporations in the world trust their money with these insurance companies.
These corporations understand that, as the world’s risk managers, insurance firms are better-equipped to manage long-term pension liabilities. The tools most of these businesses use to protect billions of pension dollars is the indexed annuity. Why wouldn’t a client want their life savings to enjoy the same protection? The financial advisors who can best inform people about financial risk, and the most effective ways to minimize it, will enjoy a lasting edge over their competitors.
For more information about the insurance industry or to receive a downloadable white paper on addressing indexed annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.
1. Time Magazine (http://content.time.com/time/business/article/0,8599,1849023,00.html)
2. NAIC.org (https://content.naic.org/)
3. Investopedia.com (https://www.investopedia.com/terms/i/insurance-guaranty-association.asp)
4. Forbes (https://www.forbes.com/advisor/life-insurance/company-out-of-business/)
5. Insurance Information Institute (https://www.iii.org/)
– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.