Insurance

What should you do if your insurer is in trouble?

insurer

Is it possible to have a highly successful and seemingly profitable insurance provider to be in trouble? YES. A good example is the American International Group (AIG) $85 billion dollar bailout that happened in 2008 where the shaky foundations of the world’s largest insurer caused consumers to go into widespread panic.

Ironic, isn’t it, considering if there’s no ASSURANCE in INSURANCE, then the industry is basically devoid of any substance. Fortunately, insurers do not go bankrupt every other day, so it’s safe to say that you need not bail out of your policy this very moment. 

Reasons why insurers fail

With the existence of so many insurers in the world, it’d be understandable for some people to play the ‘What If’ game. The main question in everyone’s mind is: What IF insurers fail? This is a completely valid question to ask, because it’s happened before. Insurance companies HAVE failed in the past, and it will happen again.

Luckily, there are less insolvent insurers compared to failed financial institution. For example, approximately 700 insurers across the world failed to uphold their business (and their promise to consumers). This happened within the 30 years between the 1970’s to year 2000. Now, compare this number against the 500 financial institutions that went insolvent during the infamous economic crisis of the 1980’s. This figure is applicable to establishments that existed in the United States ALONE. So if you think about it, the low insolvency rate of insurers is pretty encouraging to instill high consumer confidence.

Main reasons why insurers declare insolvency:

  • Underreserving: This is usually caused by poor insurance practices.
  • Lack of insight: Inability to forecast risk of catastrophes will also cause insurers to close up shop.
  • Rapid growth: Too much of a good thing is a bad thing, right? CORRECT. When an insurance company expands too much and too soon using underpricing procedures, it stretches itself thin and pretty soon, causes its own downfall.
  • Fraud: Needless to say, fraudulent activities will cause ANY company to fail. When profitability is manipulated or incompetent management left to run the business, you can be sure that trouble will be brewing very soon. 

What happens when an insurance company goes bankrupt?

Should you hear that your insurer is going bankrupt, don’t panic just yet. Your insurance company may yet be saved by the state Department of Insurance which will decide to put the firm into rehabilitation in order to salvage the situation. If this isn’t possible, they will start the liquidation process.

 You have a guardian angel in the form of your state’s insurance guarantee association. They will do all they can to transfer policies belonging to the insolvent firm to other stable (rival) companies. Policyholders will still enjoy coverage that’s capped up to $300,000. 

Looking for the next best thing?

Should you have the misfortune of having your insurer fail, you should immediately make plans to shop for new coverage. You should have plenty of time before your old policy expires so do take the time and read up on these pointers to make an informed decision regarding which new insurer’s offer to take up.

  • Think about your needs before choosing a new policy. You may be tempted to take on a larger one (thanks to a possibly over-zealous insurance sales rep), but if you assess your needs and financial standing, you should be able to make the right decision and settle on a policy that fits you just right. A cheaper policy won’t provide as much coverage, but it won’t cost you an arm and leg either.
  • Shop around for price quotes. Don’t discount independent agents as they may have their own repertoire of insurance products that fulfill your needs.
  • Before enjoying a payout from your insurer, you must pay an amount called the deductible. Some policies come with higher deductibles, thus lowering your premium, but may not be such a wise choice as more money has to be paid out before your claim will be processed.
  • Contrary to popular thinking, it’s NOT all about the money. An insurance policy may catch your interest with its low premium but what’s even more worth your money is to sign up with a trustworthy insurance company that enjoys excellent financial standing.
  • Don’t be shy in asking for discounts from your sales rep. Some companies may offer discounts at their discretion so do take the initiative to ask if you’re eligible to have your premium lowered. 

Knowing when to quit

They say breaking up is hard to do. Not so, if you’re trying to sever relationship with your insurance company. If you’re not happy with your current insurer, it’s better to throw in the towel early than suffer heartache later. Here are some issues to mull over if you are thinking about switching insurance providers:

–          Are you kept in the dark when you have a question (or a series of questions) to ask? Are your insurance customer service personnel knowledgeable enough to satisfy your curiosity?

–          Does your insurer pay out quickly, or does it take a few angry phone calls to find out what happened to your claims?

–          Do you feel like you’re being short-changed by your insurer? Are their rates way higher than others? 

The conclusion

Let’s face it: finding crystal balls on the shelves of Wal-Mart isn’t as easy as we’d like it to be, so there’s really no way we can find out how to spot insurers that may one day fail to pay out.

The best thing is to only do business with companies that are licensed to sell insurance. It helps to keep yourself informed on the best life insurance companies around. Plus, don’t put all your eggs in one basket. Know when you’re buying a product for protection (insurance) and when you’re paying for investment.

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