SOME BUSINESSES ARE giving up bargain basement insurance policies and instead seeking financially strong companies to fulfill their risk management needs.
There is a growing movement toward abandoning cheap insurance or a “flight to quality.” One of the reasons for this trend is that many businesses have encountered instances when an insurance company is unable to pay a claim. Events such as Sept. 11th; Enron and WorldCom corporate scandals; poor stock earnings; and a battered economy have contributed to several insurance insolvencies. And when an insurance company does not have the money to pay its claims, policyholders often are left with the financial responsibility.
Fortunately, the number of property and/or casualty insurer failures has dropped from 39 in 2001 to 20 in 2002, according to Weiss Ratings Inc., Palm Beach Gardens, Fla. Despite some company failures, property and casualty insurers earned an overall profit of $13.3 billion in 2002. This is compared to a $3.4 billion loss in 2001, which was mainly a result of Sept. 11th, Weiss Ratings notes. Also, improved underwriting has contributed to the industry's profitability, as insurers cut underwriting losses from $49.6 billion in 2001 to $28.3 billion in 2002.
Before purchasing company stock, investors carefully examine several factors, and insurance buyers should do the same. After all, insurance programs are enhanced by the financial strength of the insurance company. So buyers should evaluate a company's strengths prior to their purchases.
When selecting an insurance company, buyers also should:
Pay attention to ratings. Rating agencies provide an objective, third-party analysis of insurers' strengths and stability. This gives businesses impartial information that is necessary to make an educated buying decision. A.M. Best, Oldwick, N.J; Moody's Investor Service, New York; Standard & Poor's, New York; and Weiss Ratings all provide reliable ratings.
Understand a company's risk portfolio. Insurance such as medical malpractice, workers' compensation, and directors' and officers' liability are riskier than other types of insurance and may tie up an insurance company's reserves or significantly affect earnings if the company experiences losses.
Examine volatile earnings. Large shifts in earnings — increases or decreases — can signal that something is awry within the company. A drop in profits may indicate that the insurance company is not adequately underwriting its investments.
Verify an insurance company's reserves. Several of the nation's largest insurance companies have boosted their reserves to cover future asbestos liability claims. Expanding reserves indicate that the company is proactive in setting aside additional monies to meet its potential obligations. However, expansion also demonstrates that the insurer is admitting to risks and unanticipated costs.
By choosing an insurance company that is financially secure, waste firms will join the current “flight to quality” trend and ensure that their insurers will stay with them through the long haul.