Annuities involve several parties:
the contract owner, the annuitant, the product seller (agent), the
beneficiaries, and the insurer that issues the contract. Each party has specific rights and
responsibilities. The agent is not
always considered a party, since it is not necessary to involve an agent. Generally, four parties are listed as
involved in the annuity: the insurer, the contract owner, the annuitant, and
the beneficiary. Even the beneficiary
is not necessary, since it is not mandatory that one be named.
The contract owner is the person or entity that owns the
annuity. There is always a contract
owner involved in an annuity. It may be
the same as the annuitant, but not necessarily. Usually, the contract owner is the person or entity that made the
investment, but again, not necessarily so.
The annuity contract is between the insurer (issuer of the contract) and
the contract owner.
Typically the contract owner is the person or entity that
invested the money. As a result, it is
the contract owner that decides among the different options available. Contract owners have the right and ability
to add more money, if the annuity type so allows, terminate the agreement,
withdraw part or all of the money, or change the parties named in the contract.
The annuity contract is an investment in an annuity that
represents a contractual agreement between the investor and the insurer. The annuity contract contains certain
guarantees, assurances, descriptions, terms, and potential penalty provisions.
When the contract owner enters into a legal agreement with an
insurer, he or she must be aware of all the terms involved. It is the agents responsibility to make
these policy terms available for review.
If the contract owner decides to make additional deposits, withdrawals,
or a complete liquation, penalties or restrictions are likely to apply.
The actual contract owner may be an individual, more than one
person acting jointly, a trust, a corporation, or a partnership. The only requirement is that the owner must
be an adult or legal entity. A minor
can only be the owner if the policy lists the minors guardian as the
controlling party. Since the owner has
control of the investment, he or she can gift or will it in part or whole as
desired.
In past years, all annuity contracts were annuitant-driven. That means that certain provisions or sections of the annuity
contract came into being if the annuitant died, reached a certain age, or
became disabled. What happened to the
annuitant determined the use of policy provisions relating to any waivers of
insurer penalties, death benefits, IRS penalties, and required annuitization or
distribution of funds.
Recent years have seen the emergence of owner-driven policies. It is important to remember that the
annuitant and the owner may or may not be the same person. A few annuity contracts have a provision
that some sections or terms of the contract can come into being if either the
owner, co-owner, or annuitant dies, reaches the age of annuitization, or
becomes disabled. Such either/or
substitutes make the annuity contract more flexible and usually more appealing
to consumers.
How the rights of either the owner or the annuitant will be
affected depends upon the terms in the annuity contract. There are broader rights in owner-driven
contracts since it allows greater flexibility.
In a life insurance contact, the insured
is the person whose life is the contract subject. If the insured dies, the policy pays the beneficiary the sum of
money agreed upon.
In an annuity, the annuitant
is the equivalent of the insured in a life insurance contract. The annuitant is termed the measuring life. Every annuity contract must include an annuitant; just as every
life insurance policy must include the insured. The annuitant has no voice or control over the investment or its
disposition (unless the annuitant is also the policy owner). The death of the annuitant may trigger
specified policy guarantees if the money was invested in a variable
annuity. The annuitant may not make
withdrawals or deposits, change the names of the parties to the agreement, or
terminate the contract. Generally, the
annuitant must sign the contract, just as the insured must do in a life
insurance policy.
The person named as the annuitant (the insured person) can be
anyone, including the policy owner. The
only qualification is that the named annuitant is actually a person, not a
living trust, corporation, partnership, or any other non-human entity. The annuitant must be a living person who is
within the age requirements of the insurer.
Many insurers will not issue an annuity on a person who is over a
specified age. The reason has to do
with mortality rates and the ability to make payments based on the annuitants
lifespan.
Annuities generally allow the contract owner to change the
annuitant at any time. The only
stipulation is that the new annuitant must have been alive when the contract
was originally set up. Some contracts
allow you to name a co-annuitant. When
a co-annuitant is used, the contact may last longer since any forced
annuitization or contract termination could be postponed until the death of the
second annuitant. If the contract is
annuitant-driven, the death of the annuitant may require liquidation of the
annuity within a five-year period.
Having a second annuitant in a co-annuitant contract can delay this
event.
What exactly is a co-annuitant? It is a second measuring life
similar to a second-to-die in life insurance policies. Naming a co-annuitant means the death of one
annuitant will not trigger a possible forced distribution of the annuity. Only a small number of insurers include a
co-annuitant option as part of the annuity application. Many professionals dislike using more than
one annuitant in todays age of divorce.
In some situations, it is thought that having multiple annuitants can
cause legal problems when the parties legally separate and wish to separate the
annuity asset.
Whether the annuity contract comes from the consumers local
bank, financial planner, brokerage firm, or local agent the agreement is always
between the contract owner and the insurance company. There are over two thousand insurance companies in the United
States, of which several hundred deal in annuities.
The insurance company chosen is known as the insurer.
The insurer invests the money deposited according to how the application
was submitted (fixed-rate, variable, immediate, deferred, flexible, or single
premium). Depending upon the type
selected, there will be options for length of annuity duration. The application will not state the interest
rate; for that, the consumer will need to consult publications that the insurer
puts out periodically. Only the actual
contract will give complete terms and responsibilities.
Virtually all states have laws on the books regarding annuities
and other life insurance company products.
This is also true of California.
Some specific legislation especially applies to annuities, including
10127.10 through 10127.13 and 10509.6 of the California Insurance Code.
Life insurance products and annuity contracts applying to senior
citizens in California issued on or after July 1st, 2004 must have
printed on or attached to the policy or contract a notice stating that the
owner may return the policy or contract for cancellation following
delivery. The insured is considered a
senior citizen if he or she is 60 years of age or older on the date of
purchase. The policy owner must return
it by mail or in person to either the insurer who issued it or to the agent who
sold it. Although the insurer can allow
more time, it cannot allow less time than required by California. California allows 30 days to return the
contract. Since there is a 30-day
return period, the premium paid for the annuity cannot be invested anywhere
other than in fixed-income investments and money-market funds, unless the
investor specifically directs that the premium be invested in the mutual funds
underlying the variable annuity contract.
Return of the contract within the 30-day cancellation period may
not have any of the following effects:
1.
In the case of
individual variable annuities, as well as life insurance contracts, for which
the owner has not directed that the premium be invested in the mutual funds
underlying the contract during the cancellation period, return of the policy
during the cancellation period must have the effect of voiding out the policy
from the beginning date of its creation.
It shall be as if no contract ever existed, freeing all parties from any
responsibility to the annuity. The
premium and any policy fees must be refunded by the insurer to the owner within
30 days from the date that the insurer is notified that the owner has canceled
the policy.
The refund policy applies to all individual policies issued or
delivered to senior citizens in California on or after January 1st,
2004. Policies subject to this section,
which were in effect on January 1st, 2003, must be construed to be
in compliance with this section, and the insurer cannot enforce any provision
in any contract that is in conflict with it.
Every individual annuity contract, as well as life insurance
policies, (other than variable contracts and modified guaranteed contracts)
that are subject to 10127.10 relating to the refund policy that is either
delivered or issued for delivery in California must have the following notice
printed on the cover page or policy jacket in 12-point bold print with one inch
of space on all sides or printed on a sticker that is affixed to the cover page
or policy jacket reading:
IMPORTANT.
You have purchased a life insurance policy or annuity
contract. Carefully review it for
limitations.
This policy may be returned within 30 days from the date you
receive it for a full refund by returning it to the insurance company or agent
who sold you this policy. After 30
days, cancellation may result in a substantial penalty, known as a surrender
charge.
The phrase after 30 days, cancellation may result in a
substantial penalty, known as a surrender charge may be deleted if the
policy does not contain those charges or penalties (since it would not apply).
Every individual variable annuity contract, variable life
insurance contract, or modified guaranteed contract subject to this section
that is delivered or issued for delivery in California must have the following
notice either printed on the cover page or policy jacket in 12-point bold print
with one inch of space on all sides or printed on a sticker that is affixed to
the cover page or policy jacket:
IMPORTANT
You have purchased a
variable annuity contract (variable life insurance contract, or modified
guaranteed contract). Carefully review
it for limitations.
This policy may be returned within 30 days from the date you received
it. During that 30-day period, your
money will be placed in a fixed account or money-market fund, unless you direct
that the premium be invested in a stock or bond portfolio underlying the
contract during the 30-day period. If
you do not direct that the premium be invested in a stock or bond portfolio,
and if you return the policy within the 30-day period, you will be entitled to
a refund of the premium and policy fees.
If you direct that the premium be invested in a stock or bond portfolio
during the 30-day period, and if you return the policy during that period, you
will be entitled to a refund of the policys account value on the day the
policy is received by the insurance company or agent who sold you this policy,
which could be less than the premium you paid for the policy. A return of the policy after 30 days may
result in a substantial penalty, known as a surrender charge.
The words known as a surrender charge may be deleted if the
contract does not contain those charges, since they would then not apply.
The previous refund policy
would not apply to life insurance policies issued in connection with a credit
transaction or issued under a contractual policy-change or conversion privilege
provision contained in a policy.
Additionally, this section will not apply to contributory and
noncontributory employer group life insurance, contributory and noncontributory
employer group annuity contracts, and group term life insurance. If an insurer, an insurers agent, group
master policy owner, or association collects more than one months premium from
a senior citizen at the time of application or delivery of a group term life
insurance policy, the insurer must provide the individual with a prorated refund
of the premium if the senior citizen delivers a cancellation request to the
insurer during the first 30 days of the policy period. Again, a person is considered a senior
citizen if he or she is 60 years of age or older on the date of purchase of the
policy.
Insurance companies typically use illustrations to demonstrate
how a product may be expected to perform over time. Obviously, an illustration that is not realistic could be used to
mislead a consumer. California Insurance
Code 10127.11 sets down requirements relating to the use of insurer
illustrations.
Insurers and life agents issuing or delivering individual life
insurance policies and annuities to senior citizens (aged 60 or older) on or
after January 1st, 1995, with the use of non-preprinted
illustrations and non-guaranteed values must disclose on those or attached to
the cover sheet, in bold or underlined capitalized print, or in the form of a
contrasting color sticker, bright highlighter pen, or in any manner that makes
it more prominent than the surrounding material, with at least one-half inch
space on all four sides, the following statement:
THIS IS AN ILLUSTRATION ONLY.
AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, OR VALUES THAT
ARE SET FORTH IN THE ILLUSTRATION ARE NOT GUARANTEED, EXCEPT FOR THOSE ITEMS
CLEARLY LABELED AS GUARANTEED.
The types of illustration that this is addressing are those that
the agent would prepare themselves (versus the preprinted type that come with
the policy). The agent must make some
effort to alert the consumer that it is an illustration only not a guarantee
of performance. Therefore, he or she
must highlight with a bright highlighter pen, use capital letters, as we have
done here, or use some manner to alert the consumer to the statement being
made.
All preprinted policy illustrations must contain this notice in
12-point bold print with at least one-half inch space on all four sides and it
must be printed on the illustration form itself or on an attached cover
sheet. It may also be in the form of a
contrasting color sticker placed on the front of the illustration. All preprinted illustrations containing
non-guaranteed values must show the columns of guaranteed values in bold
print. All other columns used in the
illustration may be in a standard print.
Values as used here
includes cash value, surrender value, and death benefit.
Any time an insurer provides an annual statement to a senior
citizen (a person aged 60 or older at the time of policy purchase) for a
contract that was issued after January 1st, 1995, the insurer must
also provide the current accumulation value and the current cash surrender
value. 10127.12
Most annuities have surrender fees for early withdrawal outside
of the options available in the contract.
While the framework of surrender fees can vary, usually they run through
the seventh year of the contract. It
begins at seven percent during the first year, declining by one percent per
year until a zero fee is imposed in the eighth contract year. Withdrawing ten percent of the account
value, if the contract so allows, will not be subjected to surrender fees,
however.
The point of surrender fees is not hard to guess: it is a way of
discouraging clients from surrendering their policy prematurely (thus the name,
surrender penalties). Surrender charges
are often called back-end loads since the fee would apply at the end of the
annuity, when it was surrendered. The
actual percentage rate that would apply depends upon the policy terms. Every consumer should be aware of how the
surrender penalties would apply to their contract.
In California, all individual annuity contracts (as well as
individual life insurance policies) for senior citizens must either disclose
the surrender period and all associated penalties in 12-point bold print on the
cover sheet of the policy or state where that information is located in the
contract. A sticker containing this
information that is affixed to the cover sheet is sufficient as well.
Many insurance companies use agents to represent their
products. When an insurer does utilize
agents to sell their annuity products, some specific requirements exist.
Insurance sales are often a replacement business. It is the job of the Insurance Department to
protect the consumer when replacement might harm them financially. In this pursuit, some specific requirements
exist in California when replacement of insurance results from an annuity sale.
Each annuity application will contain a preprinted statement
regarding the possibility of annuity replacement, which the agent must
sign. If replacement is involved, the
agent must list all of the applicants existing life insurance or annuity
contracts that will be replaced. A copy
of the replacement notice must be provided to the applicant. The existing annuity contracts must be
identified by name of insurer, insured, and contract number. If the existing insurer has not assigned a
number, alternative identification may be used.
The replacing insurer must send each existing insurer a written
communication advising of the replacement along with the identification
information obtained and a summary of the proposed product being sold. The replacing company is not required to
include cost indices and equivalent level annual dividend figures. This written communication must be made
within three working days of the date the application is received at the
replacing companys home or regional office or the date the proposed contract
is issued, whichever is sooner.
The written communication provides the existing company with the
opportunity to conserve the existing business.
If the company or its agent attempts conservation of the business,
within twenty days from the date the written communication they must furnish
the policyowner with a policy summary for the existing annuity. The current policy year must be used to
generate information relating to premiums, cash values, or death benefits.
The company attempting replacement may request the existing
insurer furnish it with a copy of the summaries or ledger statements that are
given to the policyholder. If they so
request, it must be supplies within five working days.
The replacing insurer must maintain evidence of the
notice regarding replacement, the policy summary, the contract summary, and
any ledger statements used, and a replacement register, cross-indexed by
replacing agent and existing insurer to be replaced.
The existing insurer must maintain evidence of policy
summaries, contract summaries, or ledger statements used in any conservation
effort. Evidence that all requirements
were met must be maintained for at least three years.
Of course, the replacing insurer must provide notice that the
applicant has the right to an unconditional refund of all premiums paid if the
contract is canceled within the 30-day period beginning at the point of policy
delivery. In the case of variable
annuities, variable life contacts, and modified guaranteed contracts, returning
the contract during the 30-day cancellation period entitles the owner to a
refund of account value (not necessarily the full amount paid) along with any
fee paid for the policy. Refunds must
be made within 30 days from the date of cancellation.
While insurance products are now being sold without an agent,
especially on the internet, many insurance products still rely on the field
agent. A field producer is the best
link a consumer has to the products they purchase. The professional agent has the ability to educate the consumer so
that the products they buy will provide the services they are seeking. While the agent can be a valuable asset, he
or she can also cause many problems for the consumer if he or she lacks the
education required to fully perform their duties.
Agents have specific legal obligations to the client. When that client is considered a legal
elder, there are some additional obligations. An elder is defined,
for the purpose of this section, to mean any person residing in California who
is 65 years of age or older. It should
be noted that a senior in defined in other areas of the law as an individual
who is 60 years old or more.
When an agent sells an elder an annuity, he or she has a legal
obligation to inform the elder (or the elders representative) in writing if the
sale or liquidation of any asset that will be used to fund the annuity may have
a tax consequence, early withdrawal penalties, or other costs or penalties as a
result. They must further advise that
the elder may wish to consult independent legal or financial advice before
selling or liquidating assets. This
would not apply to a credit life insurance product.
If the agent is selling the consumer (an elder) an annuity on the
basis of how they will qualify for Medi-Cal, he or she may not negligently misrepresent
the treatment of any asset under the statutes, rules, or regulations of the
Medi-Cal program, as it pertains to the determination of the elders
eligibility for any program of public assistance. The following disclosure must be made to the elder or the elders
representative in writing:
Notice regarding standards for Medi-Cal eligibility:
If you or your spouse is considering
purchasing a financial product based on its treatment under the Medi-Cal
program, read this important message!
You or your spouse does not have to use up
all of your savings before applying for Medi-Cal.
UNMARRIED RESIDENT
An unmarried resident may be eligible for
Medi-Cal benefits if he or she has less than [insert amount of individuals
resource allowance] in countable resources.
The Medi-Cal recipient is
allowed to keep from his or her monthly income a personal allowance of [insert
amount of personal needs allowance] plus the amount of any health insurance
premiums paid. The remainder of the
monthly income is paid to the nursing facility as a monthly share of cost.
MARRIED RESIDENT
Community Spouse Resource Allowance:
If one spouse lives in a nursing facility, and the other spouse does not lie in
a facility, the Medi-Cal program will pay some or all of the nursing facility
costs as long as the couple together does not have more than [insert amount of
community countable assets].
Minimum Monthly Maintenance Needs
Allowance: If a spouse is eligible for Medi-Cal payment of nursing facility
costs, the spouse living at home is allowed to keep a monthly income of at
least his or her individual monthly income or [insert amount of the minimum
monthly maintenance needs allowance], whichever is greater.
FAIR HEARINGS AND COURT ORDERS
Under certain circumstances, an at-home
spouse can obtain an order from an administrative law judge or court that will
allow the at-home spouse to retain additional resources or income. The order may allow the couple to retain
more than [insert amount of community spouse resource allowance plus
individuals resource allowance] in countable resources. The order also may allow the at-home spouse
to retain more than [insert amount of the monthly maintenance needs allowance]
in monthly income.
REAL AND PERSONAL PROPERTY EXEMPTIONS
Many of your assets may already be
exempt. Exempt means that the assets
are not counted when determining eligibility for Medi-Cal.
REAL PROPERTY EXEMPTIONS
One Principal Residence: One property
used as a home is exempt. The home will
remain exempt in determining eligibility if the applicant intends to return
home someday.
The home also continues to be exempt if the
applicants spouse or dependent relative continues to live in it.
Money received from the sale of a home can
be exempt for up to six months if the money is going to be used for the
purchase of another home.
Real Property used in a
business or trade: Real estate used
in a trade or business is exempt regardless of its equity value and whether it
produces income.
PERSONAL PROPERTY AND OTHER EXEMPT ASSETS
IRAs, Keoghs, and Other
Work-Related Pension Plans: These
funds are exempt if the family member whose name it is in does not want
Medi-Cal. If held in the name of a
person who wants Medi-Cal and payments of principal and interest are being
received, the balance is considered unavailable and is not counted. It is not necessary to annuitize, convert to
an annuity, or otherwise change the form of the assets in order for them to be
unavailable.
Personal Property Used in a Trade or
Business.
One Motor Vehicle.
Irrevocable Burial Trusts or Irrevocable
Prepaid Burial Contracts.
There May Be Other Assets That May Be
Exempt.
This is only a brief description of the
Medi-Cal eligibility rules. For more
detailed information, you should call your county welfare department. Also, you are advised to contact a legal
services program for seniors or an attorney who is not connected with the sale
of this product.
I have read the above notice and have
received a copy.
Dated: _______ Signature: _________________________________
The above statement must be printed in at least 12-point type, be
clearly separated from any other document and be signed by the prospective
purchaser and that persons spouse or legal representative, if any.
The State Department of Health Services will update this form to
ensure consistency with state and federal law and make the disclosure available
to agents and brokers through its Internet Web site.
While it is more common to replace life and health products,
agents may also replace annuities. Any
agent who accepts an application for an annuity must do two things: (1) secure
a statement signed by the applicant as to whether or not replacement of an
existing contract is involved, and (2) secure a signed statement as to whether
or not the agent knows replacement is, or could be, involved in the
transaction. Both of these statements
will be part of the application package.
If product replacement is involved, the agent must then do the
following:
The applicant must receive either originals or copies of all
printed communications used during the presentation of the annuity contract, so
that he or she may further study them if so desired. The replacing insurer must receive, along with the application
for coverage, a copy of the signed replacement notice.
If the company being replaced attempts conservation of their
product, they must leave original copies any printed or written materials used
in this effort with the insured as well.
When a contract is being replaced, there is a specified form that
must be used. That form must be given
to the applicant at the time of application:
Notice Regarding
Replacement
Replacing Your Life Insurance Policy or Annuity?
Are you thinking about
buying a new life insurance policy or annuity and discontinuing or changing an
existing one? If you are, your decision
could be a good one or a mistake. You
will not know for sure unless you make a careful comparison of your existing
benefits and the proposed benefits.
Make sure you understand
the facts. You should ask the company
or agent that sold you your existing policy to give you information about it.
Hear both sides before you
decide. This way you can be sure you
are making a decision that is in your best interest.
We are required by law to
notify your existing company that you may be replacing their policy.
Applicant: ____________ Agent: _____________ Date: ____
Agents are required to fairly and accurately represent not only
their own products, but also those of companies they are attempting to replace. California especially considers it a
violation when these actions concern the unnecessary purchase or replacement
for an individual 65 years of age or older.
What exactly is an unnecessary replacement? According to California Insurance Code, an
unnecessary replacement means the sale of an
annuity to replace an existing annuity that requires that the insured will pay
a surrender charge for the annuity that is being replaced and that does not
confer a substantial financial benefit over the life of the policy to the
purchase so that a reasonable person would believe that the purchase is
unnecessary.
In other words, when the replacements do not substantially or
meaningfully improve the insureds financial position, it is probably not a
good idea to replace the contract and a reasonable person would not do so.
Unfortunately, some agents feel it is easiest to avoid
replacement paperwork, so they merely indicate that no replacement is taking
place when, in fact, it is. Should
patterns appear of policyowners who purchase replacement contracts (while
indicating on applications that no replacement is involved) from the same
selling agent, it will be presumed by California Insurance Department that it
is the agents intent to violate California law.
All disability and life insurance contracts and certificates
offer individuals who are age 65 or older the opportunity to examine their
policies for 30 days. If, during that
time, they decide they do not wish to purchase it after all, they may return
the contract for a refund. The 30-day
period begins from the time the policy has been delivered to them (not from the
time of purchase). If they decide to
return it for a refund, the policy or certificate is totally voided, as if no
policy or certificate had been issued.
All premiums and fees must be refunded to the applicant within 30 days
from the date the insurer receives the returned contract. Should the insurer fail to refund all
premium and fees within that 30-day period, the applicant is entitled to
receive interest on the premium at the legal rate of interest on judgments
provided under the Code of Civil Procedure.
The interest would be due from the date the insurer received the
returned policy.
Each policy and certificate must print this 30-day right to
return a policy for refund in no smaller than 10-point uppercase type, on the
policys cover page and the outline of coverage. It should further instruct the purchaser to return it either in
person to their agent or via regular mail to their agent or the insurer.
It has been said that insurance policies are the number one
unread best-selling manuscript. That is
due to the fact that few consumers read the policies they purchase. Unfortunately, many agents also do not read
the policies they sell. Every insurer
makes sample policies available to their field staff. The intent, obviously, is for their agents to read the policies
they are recommending to consumers.
While brochures may go a long way to give an overview of a
product, only the policy is the actual authority on how provisions will affect
it. Brochures will not contain the
entire implications of all that affect the contract because it is not the
insurers intent to do so in this document.
Agents have a responsibility to know and understand the entire
policy. As the agent reads the policy,
each section should be clearly understood.
If an agent has questions regarding the policy it is important that he
or she contact the home office to determine the answer. This process should be completed prior to
introducing the product to any consumer.
Fire and casualty agents and brokers must prominently display
their license so that any consumer entering their office may see and inspect
it. California wants consumers to be
able to ascertain both its current status and how the agent is licensed in the
state.
An agents license number must be prominently displayed on
business cards in the same size of font as the telephone number and
address. Advertisements and written
price quotations for specific products must also display the agents license
number in the same size of font as the telephone number and address. If the licensee maintains more than one
organization license, one of the organization license numbers is sufficient for
compliance with California requirements.
|
A new requirement: the word
insurance must be on business cards. |
A new requirement took effect January 1st, 2005. As of that time, licensees must prominently
print on their business cards the word insurance in the same size print as
the largest printed telephone number.
For those who work as transactors, or agent and broker licensees who are
classified as solicitors, working as exclusive employees of motor clubs, organizational
licensee numbers must be used.
It is very important that
agents be aware of the 2005 requirement.
Any person in violation of this requirement will be subject to a $200
fine for the first offense, $500 fine for the second offense, and $1,000 fine
for the third and subsequent offenses.
Obviously, it would be foolish to have even one fine occur, let alone
three or more. The penalty cannot
exceed $1,000 for any one offense.
Fines will be deposited into the Insurance Fund.
If the commissioner finds
that the failure of a licensee to comply with the requirement is due to
reasonable cause or circumstances beyond his or her control, and that the agent
has been exercising ordinary care, with no willful neglect, the fine may be
waived. An agent who has been fined and
feels that the fine should be waived must file such a statement, with
supporting documents, stating the facts.
This new insurance
requirement does not apply to everything.
It would not apply to a person or entity that is not currently required
to be licensed by the department or is exempted from licensure. It would not apply to general advertisements
of motor clubs that merely list insurance products as one of several services
offered, as long as no details of an insurance product are listed. It would not apply to life insurance policy
illustrations required by other California Chapters.
The Beneficiary
The beneficiary is the person
or entity to whom the life or annuity proceeds will be payable at the death of
the insured person. It could be a
spouse or other family member; it could be a charitable organization; or it
could be simply a friend. Some types of
contracts have traditionally required the beneficiary to have an insurable
interest. An insurable interest is
required only at the inception of the policy and will not apply to any
subsequent transfers of the policy, at maturity of the policy, or for a death
claim.
What exactly is an insurable
interest? It refers to an individual or
entity having a beneficiary link to the insured person. The beneficiary has an interest in the
insureds life in some way. Broadly
speaking, insurable interest arises either out of close family relationships
or from substantial economic interest in the continued life of the person
insured. This means there must be a
reasonable ground to expect some type of benefit or advantage from the continuance
of the insureds life.
In more recent years, either
by judicial decision or by statute, a person has been regarded as having an
insurable interest in his or her own life. As a result of this self-interest, he or she may legally contract
for insurance of which he or she is the owner and may generally name a
beneficiary of his or her own choosing even if the beneficiary has no visible
insurable interest in the insureds life.
However, if the policy is applied for and owned by someone other than
the insured, the applicant-owner must have an insurable interest in the
life of the insured.
Most professionals recommend
the naming of two beneficiary designations: primary and contingent. A primary
beneficiary is the person or entity to whom the life insurance
proceeds are paid if that beneficiary or entity is alive or in existence at the
time the insured dies.
A contingent
beneficiary is the person or entity to whom the life insurance
proceeds are paid if the primary beneficiary is dead or no longer in existence
(in the case of an entity) at the time the insured dies. If no contingent beneficiary was named and
the primary beneficiary had predeceased the insured, the proceeds would be paid
to the estate of the primary beneficiary and possibly subject to delays and
additional taxes.
A beneficiary has little
status in a policy prior to the insureds death. The annuitants beneficiary has no voice in the control or
management of the policy. The only way
the beneficiary will prosper is through the death of the insured.
Annuities can list
beneficiaries in the same way that life insurance policies can. Spouses, children, other relatives, and
friends may all be named beneficiaries.
Entities can also be named.
Usually organizations listed as beneficiaries tend to be charitable
organizations, such as animal rescue groups, the Red Cross, United Way, or
medical research organizations. Trusts,
corporations, and partnerships may be listed beneficiaries. Some individuals create a trust document,
and then list the beneficiary on their annuity and life insurance policies as
the trust created in their own name.
The trust would then distribute funds according to the trust directions.
There can be more than one
beneficiary listed, without being dependent upon the primary beneficiarys
death. When more than one person or entity share in the proceeds, but not on a
contingent basis, they are called co-beneficiaries. Co-beneficiaries may be listed in any fractional manner: 50/50,
40/60, and so forth.
Married and other committed
couples commonly take out annuities, with themselves as contract owner, and
their partner as beneficiary. This
keeps ownership of their assets between of the two of them until they both
die. Some insurers allow co-ownership,
in which case both spouses could be the owners. However, many insurers discourage this due to the high divorce
rate.
A single person, including
widows and widowers, often name oneself as the contract owner and
annuitant, while listing a family member, charity, or trust as the
beneficiary. This allows complete
control over the annuity until their death.
The contract owner can change
the beneficiary at any time. The
consent of the beneficiary is never required.
It is not unusual for a beneficiary to have no knowledge that they have
even been listed in the annuity to receive funds at the insureds death. Since it is not required to notify the
beneficiary when they are named, it is also not necessary to notify the
individual if their name is removed.
Annuity Settlement Options for the
Beneficiary
Annuities are not designed with a
beneficiary in mind. Annuities are
designed to provide the policy owner or annuitant with income during life. As a result, beneficiaries are not always
going to be happy with the settlement options chosen by the policy owner.
Annuitization has several options available:
1.
Single
Life: The annuitant is considered to be the measuring life. The Single Life payout option is designed for only the annuitant
or contract owner. A set amount will be
received on a regular basis, usually monthly. The amount received will not
change. That amount will continue until
the annuitant dies. No leftover
funds will be distributed to any beneficiaries. Even if the annuitant received only one payment on thousands of
dollars deposited, once he or she dies, there will be no inheritance available.
Joint-and-Last-Survivor: Under this option, the
insurance company will make monthly payments for as long as either of two named
people lives. Beneficiaries will
receive nothing once both named people die. Like the Single Life payout option, this is
designed for the named annuitants or owners not for beneficiaries. As in the life option, one could say that
the insurance company is hoping for the early death of both annuity
participants. It would have to be the
death of both, since the death of just one would not stop payout. Once both have died, all payout stops. Nothing would continue on to any named
beneficiary.
2.
Lifetime
with Period Certain: This may also be called Life and
Installments Certain. Either way,
the key word here is certain. The "certain" period of time is
usually either ten or twenty years, but may be another time period also. This payout option may allow payment to
continue on to a beneficiary, assuming one has been named and there is time
left in the Period Certain. If no
beneficiary were named, the remainder of payments in the certain time period
would go to the estate. While this
payout option does not maximize the amount the annuitant would receive each
month, it does include a beneficiary if that is the desire. It must be noted that the beneficiary
receives an inheritance only if there is time remaining in the certain
period. That time period begins from
the first annuity payment made not from the point of the annuitants death.
3.
Cash
Refund Annuity: This option refers to the specified number
of years or specified dollar amount option.
If the annuitant dies before the insurance company has paid out the amount
invested, then the remainder of the invested money (plus interest) will be paid
out in monthly installments or in a lump sum to the named beneficiary or
beneficiaries.
In each of
these options, the insurance company pays nothing beyond either a specified
time or a specified dollar amount.
The joint-and-last-survivor is often used by married couples. In this payout option, the spouse would be
part of the annuitant side not the beneficiary side - of the contract. The only way a spouse would inherit outside
of being an annuitant or owner is through Period Certain and Cash Refund payout
options. The same is true for any other
listed or desired beneficiary.
On all of these options, nothing beyond the
terms of the contract would be paid to the estate. Remember that an annuitant could live to be extremely old and
still receive monthly income - far past
the amount ever paid into the annuity.
On the other hand, he or she could die far sooner than expected, leaving
the beneficiaries with nothing from their annuity.
To recap:
1. Single Life = nothing after the death of the
annuitant;
2. Joint-and-Last-Survivor = nothing after BOTH named people
have died;
3. Lifetime With Period Certain = nothing after the death of the
annuitant or until the stated time period; whichever comes last.
4. Cash Refund = nothing after the full account has
been paid out whether to the annuitant or a beneficiary.
Advertising
Most
industries advertise. It is a way of
reaching new clients and promoting business.
A company that does not continue to bring in business cannot
survive.
In
California, any advertisement or other activity designed to produce leads based
on a response from a potential insured that is directed towards individuals age
65 or older must prominently disclose that an agent may contact them, if that
is the intention. Agents must disclose
that they are contacting the consumer as a result of a generated lead at the
point of initial contact.
The source
of the lead must be true, without intent of deception. Using a fictitious name, or a true name in a
misleading manner is prohibited. In
past years, it was common to use a name so similar to a nationally recognized
organization that a consumer could easily misunderstand who was actually
contacting them. California Insurance
Code 787 is attempting to prevent this situation by requiring that anyone who
is contacting a consumer truthfully represent themselves and the purpose of
their advertisement.
An
advertisement is considered to include envelopes, stationery, business cards,
or any material that is designed to describe and encourage the purchase of a
policy or certificate of disability insurance, life insurance, or an annuity.
Furthermore, advertisements may not employ words, letters, initials,
symbols, or other devices that are so similar to those used by governmental
agencies, nonprofit or charitable institutions, senior organizations, or other
recognized companies that would mislead the public. No advertisement may suggest a government agency, nonprofit or
charitable group, or senior organization in some way endorses them. Therefore, advertisements also may not use
any symbols connected to these organizations.
Advertisements may not suggest that which is not true. For example, it is not legal to imply that
the reader may lose a right or privilege, benefits under federal, state, or
local law if he or she fails to respond to the advertisement. Misleading return addresses also may not be
used, even on an envelope or other item related to the advertisement. The return address cannot suggest a
government involvement or imply that the advertisement is somehow related to a
group when, in fact, it is not. Nothing
may imply anything other than the truth of where the ad originates.
Insurance
agents and brokers must have the insurers approval in writing before they use
any advertisement bearing that companys name or insignia. They may not advertise a policy, even though
it may be available, without first obtaining written approval from the company
issuing it.
Agents may
not state or imply that members of an occupational class or members of a
particular group will be receiving special rates or status unless that is
actually the case. If the policy being
advertised will be sold on an individual basis at regular rates, then only that
may be stated.
If a
public meeting is being advertised for the purpose of selling or promoting
insurance products, no deceptive or misleading advertisement for the event may
be used. Such terms as seminar,
class, informational meeting, or substantially similar wording may not
be used to mislead consumers regarding the true purpose of the event. If such terminology is used, it must also
state and insurance presentation immediately following in the same type size and
font.
Agents are
sold every day in much the same manner as they attempt to sell others. In order for insurance companies to be
successful they must market their products.
To do this they recruit a sales staff.
Career agents understand the importance of choosing companies
wisely. Unhappy clients voice their
complaints to their friends.
Rating
companies look at the various insurance companies and assign a grade to each
company. How that grade is arrived at
will depend upon the rating service, but all of them consider basic components,
such as financial strength and ability to conduct business long-term.
A. M. Best Company
Perhaps the best-known rating company is A.
M. Best Company of Oldewick, New Jersey, which publishes Bests Insurance
Reports. This is the oldest
insurance industry rating service.
Alfred M. Best began the company in 1899. It was known as an independent watchdog for the insurance
industry. The agent or consumer can
obtain statistical data and comments about the background and operational
methods of American and Canadian insurance companies.
A. M. Best provides information regarding an
insurance company's financial condition, a brief history of the company in
question, information on its management, operating comments and states in which
it is allowed to write and sell business.
A.M. Best also grants its own ratings to companies, designed to reflect
strength and weaknesses in four areas:
1.
underwriting,
2.
expense control,
3.
reserve adequacy, and
4.
investments.
Companies not receiving one of these
classifications are rated as Not Assigned.
This could mean there was not enough data available to assign a
classification or it could mean the company was below minimum standards and
could not achieve any rating at all, not even the lowest category of C.
Anybody shopping for an insurance company
wants to choose one that will be around for as long as their money is invested
in that company's product. Companies
have been developed which rate insurance companies on numerous facets. What they look for will appear similar to
the car ratings in Consumer Reports magazine since they look at dependability,
durability, and safety among other things.
You may not find a rating on an insurance
company in question for two reasons; they did not want to pay the $500 fee, or
requested the rating not be published.
In this instance, the company is listed, but without the rating that was
given.
In most cases, a policyholder would be wise
to place their trust in a company rated A or A+ by A.M. Best. An agent would want to look at the rating
system in order to provide a sound company for the policyholder's
investment. Most people probably would
not do their own research on a company, even for their financial
stability. As with all insurance
products, whether annuities or life insurance, due diligence is essential when
recommending a product to a client.
Agents should read the annuity or life insurance contracts in their
entirety. The history of a company's
investment portfolio should be considered before recommending a company. A.M. Best provides one source that this can
be done through. Some critics, though,
question the integrity and meaningfulness of the A.M. Best ratings, claiming
that the information upon which the ratings are based is old information and
that insurance companies can pressure them for a better rating. A.M. Best, of course, defends its integrity
and objectivity.
As annuities become more competitive,
insurance companies may be tempted to overextend themselves. Due Diligence requires an agent evaluate the
carriers that they represent. An agent
should know where their carriers are investing their money. An agent should know for how long the money
is invested. Most importantly, an agent
should know the ratio of assets to liabilities in the companies they
represent. Remember that the size of
the assets alone means very little. If
liabilities outmatch assets, trouble could possibly develop.
A.M. Best is only one source where company
information can be found. There are
other sources that can be utilized regarding the ability of an insurance
company to make good on their promises.
A.M. Best Company can be contacted directly at:
Ambest Road
Oldewick, NJ 08858
(800) 424-BEST (there is a fee for receiving this service)
The following is a list of the A.M. Best
ratings and what they mean, how they can be modified and how the "not
assigned" ratings can be interpreted.
For an agent, use only the most current book. Summaries are available from A.M. Best and even insurance
companies themselves.
A+ (Superior)
Assigned to the companies which A.M. Best
thinks has achieved superior overall performance when compared to the norms of
the life/health insurance industry.
Relatively, the A+ rated insurance companies generally have demonstrated
the strongest ability to meet their respective policyholder and other
contractual obligations.
A (Excellent)
Assigned to the companies which A.M. Best
thinks has achieved excellent overall performance when compared to the norms of
the life/health insurance industry.
Relatively, A rated insurance companies generally demonstrate a strong
ability to meet their respective policyholder and other contractual obligations.
B+ (Very Good)
Assigned to the companies which the A.M.
Best thinks has achieved a very good overall performance when compared to the
norms of the life/health insurance industry.
Relatively, B+ rated insurance companies generally demonstrate a very
good ability to meet their policyholders and other contractual obligations.
B (Good)
Assigned to the companies that A.M. Best
feels has achieved good overall performance when compared to the norms of the
life/health insurance industry.
Relatively, B rated insurance companies generally demonstrates a good
ability to meet their policyholder and other contractual obligations.
C+ (fairly Good)
Assigned to the companies which the A.M.
Best thinks has achieved fairly good overall performance when compared to the
norms of the life/health insurance industry.
Relatively, C+ rated insurance companies generally demonstrate a fairly
good ability to meet their policyholder and other contractual obligations.
C (Fair)
Assigned to the companies which the A.M.
Best thinks has achieved fair overall performance when compared to the norms of
the life/health insurance industry.
Relatively, C rated insurance companies demonstrate a fair ability to
meet their policyholder and other contractual obligations.
A. M. Best's Rating Modifiers:
The
following rating modifiers can be attached to an A.M. Best's rating
classification of A+ through C. The
modifiers are used to qualify the status of the assigned rating. The modifier will appear as a lower case
suffix to the rating.
c - Contingent Rating
This means that it is temporarily assigned
to an insurance company when there has been a decline in performance in its
profitability, leverage and/or liquidity results, but the decline has not been
significant enough to warrant an actual reduction in the company's previously
assigned Rating. A.M. Best's evaluation
may be based on the availability of more current information and/or contingent
on the successful execution by management of a program of corrective action.
e - Parent Rating
This means that a company which meets A.M.
Best's minimum size requirement and is a wholly owned subsidiary of a rated
life/health insurance company, insurer.
However, it has not accumulated at least five consecutive years of
operating experience for rating purposes.
The parent company's rating is reference for companies which meet this
criteria until such time as the subsidiary is assigned an A. M. Best's Rating.
p - Pooled Rating
This is assigned to companies under common
management or ownership which pool 100 percent of their net business. All premiums, expenses and losses are
prorated in accordance with specified percentages that reasonably relate to the
distribution of policyholders' surplus of each member of the group. All members participating in the pooling
arrangement will be assigned the same rating and financial size category, based
on the consolidated performance of the group.
r - Reinsured Rating
This indicates that the rating and financial
size category assigned to the company is that of an affiliated carrier which
reinsures 100 percent of the company's business.
Ratings Not Assigned Classification
Companies not receiving an A.M. Best's
Rating (A+ to C) are assigned to a rating of "not assigned"
classification, which is abbreviated NA.
This is divided into ten classifications to identify the reasons why the
company was not eligible or assigned an A.M. Best's Rating. The primary reason is identified by the
appropriate numeric suffix.
NA-1 Inactive
This is assigned to a company which has no
net insurance business in force or is virtually dormant and is not 100 percent
reinsured by another company. Normally,
A.M. Best will continue to report on an inactive company if it is associated
with a group or is an unaffiliated stock company pending sale to a new owner.
NA-2 Less than Minimum
Size
This is assigned to a company whose annual
net premiums written do not meet A.M. Best's minimum size requirement of
$1,000,000. The exceptions are:
1. The
company is 100 percent reinsured by a rated company, or
2. The
company is a member of a group participating in a business pooling arrangement,
or
3. The
company was formerly assigned a rating and is expected to meet the minimum size
requirement within a reasonable period of time.
NA-3 Insufficient Experience
This is assigned to a company which meets
A.M. Best's minimum size requirement, but has not accumulated at least five
consecutive years of representative operating experience. For most companies, the year that A.M. Best
anticipates assigning a rating is referred to in the report on the company as
set forth in A.M. Best's Insurance Reports, Life/Health Edition. For all life/health companies in this
category which are wholly owned subsidiaries of a rated life/health insurance
company, the rating of the parent company will also be shown for reference
purposes in A.M. Best's Insurance Reports, Life/Health Edition, until such time
as the subsidiary is assigned a rating.
NA-4 Rating
Procedure Inapplicable
This is assigned to a company when the
nature of its business and/or operations are such that A.M. Best's normal
rating procedure for life/health insurance companies do not properly
apply. Those companies writing lines of
business uncommon to the life/health field; or companies not soliciting business
in the United States; or companies
which are not actively soliciting new business and are in a run-off
position; or companies whose sole
insurance operation is the acceptance of business written directly by a parent,
subsidiary or affiliated insurance company
or those writing predominantly property/casualty insurance under a dual
charter would be assigned to this classification.
NA-5
Significant Change
This is assigned to a previously rated
company whose representative operating experience has been, or is expected to
be, significantly interrupted or changed.
This may be the result of change in ownership and/or management whereby
the existing book of business is sold or reinsured; or a significant revision in
the portfolio of coverage offered; or any other relevant event(s) which has or
may affect the general trend of a company's operations. Depending on the nature of the change, A.M.
Best's rating procedure may require the company is eligible for a rating.
NA-6
Reinsured by Unrated Reinsurer
This is assigned to a company which has
reinsured a substantial portion of its book of business or maintains
considerable amounts of reinsurance recoverable in relation to the
policyholder's surplus with reinsurers which have not been assigned a A.M. Best
Rating.
NA-7
Below Minimum Standards
This is assigned to a company that meets
minimum size and experience requirements, but does not meet the minimum
standards for A.M. Best's Rating of "C."
NA-8
Incomplete Financial Information
This is assigned to a company which fails to
submit, prior to the rating deadline, complete financial information for any
year in the current five year period of review. This requirement also includes all domestic life/health
subsidiaries in which the company's ownership exceeds 50 percent.
NA-9
Company Request
This is assigned when a company is eligible
for a rating but disputes the A.M. Best's Rating assignment or procedure. If a company subsequently requests a rating
assignment, A.M. Best's policy normally requires a minimum period of three
years to elapse before the company is eligible for a rating.
NA-10 Under State
Supervision
This is assigned when a company is under
conservator ship, rehabilitation, receivership or any other form of supervision,
control or restraint by state regulatory authorities.
Standard & Poors Corporation Rating System
Standard & Poor's rating system is along
the same lines as A.M. Best's. Standard
& Poor's insurance claims-paying ability rating is an opinion of an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms.
The claims-paying ability ratings are based on current information
furnished by the insurance company or obtained by Standard and Poor's from
other sources it considers reliable.
They do not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings listed below may be modified by adding a plus or
minus sign to show relative standings within the major rating categories.
These reports are generally not available to
the public unless the insurance company that purchases the report chooses to
make it available to the policyholders.
Standard & Poor's Corporation is at:
25 Broadway
New York, NY 10004
(212) 208-8000
AAA
Extremely strong capacity to meet
contractual policy obligations.
AA
A very strong capacity to meet contractual
policy obligations.
A
Strong capacity to meet contractual policy
obligations.
BBB
Adequate capacity to meet contractual policy
obligations.
BB, B, or CCC
Uncertain or weak capacity to meet
contractual policy obligations, with CCC assigned to those with the
weakest or most uncertain capacity.
D
Default.
Terms of the obligation will not be met.
THE FOLLOWING COMMENTS ARE EXCERPTED FROM STANDARD & POOR'S
INSURANCE RATINGS "FOCUS", DECEMBER 1995, VOL. 4, NO. 4
Some people believe that insurer ratings are
precise "scientific" measures of the financial strength of
insurers. Ratings, they think, are like
a blood pressure test or taking one's temperature. Such tests produce exact results and therefore by that analogy,
ratings ought to communicate equally exact information. Of course, this is not always the case, but
by looking at the ratings from several companies, a fair opinion can be
reached.
Standard & Poor's ratings are opinions
about the financial health of insurers based on the analysis conducted by our
professional insurance analysts. These
analysts, based in New York, Toronto, London, Tokyo, Melbourne, and Paris have
spent many years evaluating the financial strength of insurance companies in
more than 70 countries throughout the world.
Although many of the tools that financial analysts use to evaluate
insurers are very precise just like the medical tests used by a doctor, the
conclusions that analysts reach from studying these results are a matter of
judgment. Ratings are therefore our
judgment of the financial stability of many thousands of insurance companies.
The insurers we rate in the
"secure" range have, in our opinion, the financial strength to honor
their policyholder obligations. In
other words, at a BBB ("adequate financial security) rating, the insurer
has met all of our standards of a secure company.
Although some respected observers recommend
that insurance be purchased from an insurer that has the top two ratings of two
recognized rating agencies, not everyone agrees with this very conservative
advice. Certainly, this is not Standard
& Poor's viewpoint. In fact what we
are saying is that insurers rated BBB or higher are, in our judgment, secure
and likely to remain so.
The growing reliance on these ratings is a
healthy, positive development. Making
better-informed decisions about financial strength of insurers is good for
consumers, good for brokers, and ultimately good for the industry itself.
Moodys Rating System
Moody's concentrates a little more on the
quality of the company's investment portfolio.
Moody's Investors Service entered the bond-rating business in 1904. They have been evaluating life insurance
companies since the 1970s. In 1986
Moody's introduced insurance financial strength ratings to provide guaranteed
investment contract (GIC) investors with objective, independent credit
opinions. In April 1991, the firm
revised several elements of its benchmark capital ratio to reflect the changing
nature of risk in the life insurance industry and to improve the accuracy of
the ratio. Moody's offers financial strength
ratings on nearly 80 life insurance companies, and the list continues to
grow. The rated companies represent
more than 60 percent of the life insurance industry's assets and more than 90
percent of total GIC assets.
Insurance companies pay approximately
$25,000 for the rating services.
Moody's sees its real clients as financial intermediaries such as
brokers, pension plan sponsors, structured settlement advisors and agents. Much of their attention has been given to
companies involved in group pensions and individual annuity business. In recent times, coverage has expanded from
initial focus on companies selling GICs to annuity providers, universal life
writers, and providers of other life products.
Like Standard & Poor's rating service,
Moody's ratings are not generally available to the public unless the insurance
company chooses to make them available to the policyholder. For an annual fee of $125, Moody's quarterly
Life Insurance Handbook gives ratings, explains rationale, and provides executive
summaries for all life insurance companies.
The company can be contacted at:
99 Church Street
New York, NY 10007
Aaa
Insurance companies which are rated Aaa
are judged to be of the best quality. Their
policy obligations carry the smallest degree of credit risk. While financial strength of these companies
is likely to change, such changes as can be visualized are most likely to
impair their fundamentally strong position.
Aa
Insurance companies which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group they comprise what is
generally known as high-grade companies.
They are rated lower than the best companies because long-term risks
appear somewhat larger.
A
Insurance companies which are rated A
possess many favorable attributes and should be considered upper-medium
grade. Factors giving security to
punctual payment of policyholder obligations are considered adequate but
elements may be present which suggest a susceptibility to impairment some time
in the future.
Baa
Insurance companies which are rated Baa
are considered as medium-grade, i.e., their policyholder obligations are
neither highly protected nor poorly secured.
Factors giving security to punctual payments to the policyholder
obligations are considered adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These companies' policy
obligations lack outstanding investment characteristics and in fact have
speculative elements as well.
Ba
Insurance companies which are rated Ba
are judged to have speculative elements;
their future cannot be considered as well assured. Often the ability of these companies to
discharge policyholder obligations may be very moderate and thereby not well
safeguarded during other good and bad times in the future. Uncertainty of position characterizes
policyholder obligations of insurance companies in this class.
B
Policyholder obligations of insurance
companies which are rated B generally lack characteristics of the
desirable insurance policy. Assurance
of punctual payment of policyholder obligations over any long period of time is
small.
Caa
Insurance companies which are rated Caa
are of poor standing. They may be in
default on their policyholder obligations or there may be present elements of
danger with respect to punctual payments of policyholder obligations and
claims.
Ca
Insurance companies which are rated Ca
are speculative in a high degree. Such
companies are often in default on their policyholder obligations or have other
perceived shortcomings.
C
Insurance companies which are rated C
are the lowest rated class of insurance companies and can be regarded as having
extremely poor prospects of ever attaining real investment standing.
The Fitch Ratings
Fitch Ratings was founded as the Fitch
Publishing Company on December 4th, 1913 by John Knowles Fitch. Established in New York City, the company
began as a publisher of financial statistics whose consumers included the New
York Stock Exchange. Fitch became the
recognized leader in providing critical financial statistics to the investment community
through such publications as the Fitch Bond Book and the Fitch Stock and
Bond Manual.
In 1924 Fitch introduced the familiar AAA
to D ratings that we often use today to rate insurance companies. In 1975 Fitch was one of three statistical
organization companies recognized by the Securities and Exchanges Commission.
Since 1989, when Fitch was recapitalized by
a new management team, Fitch has seen lots of growth. In 2000 Fitch acquired Duff & Phelps Credit Rating Company,
headquartered in Chicago. Later that
same year they bought the rating business of Thomson BankWatch. These two purchases added a significant
number of international offices and affiliates.
Duff & Phelps Credit Rating Company
included an insurance company management interview, quantitative analysis and a
view of the company's future. The
ratings were updated quarterly in a effort to make the material more
timely. Duff & Phelps rated
approximately thirty insurance companies during the 1989-1990 period as
contracted for by the insurance companies.
When Duff & Phelps rating process was
operational, it was divided into four parts.
1.
Duff & Phelps requested the company's financial
reports.
2.
Representatives traveled to the insurance company for an
initial on-site interview after the reports had been received. During the meeting, the rater met in groups
and individually with key management personnel, including the chief executive
officer, chief financial officer, chief investment officer and product
managers.
3.
Duff & Phelps invited a group of executives from the
insurance company to their Chicago headquarters to confer with members of the
rating committee. This meeting gave the
insurance company the opportunity to meet its evaluators and get a better sense
of their rating process.
4.
The rating committee convened to establish a rating. It presented the grade and an analysis to
the insurance company. The insurance
company could then choose either to publish or discard the results.
As part of the contract, the insurance
company agreed to provide relevant financial information quarterly, for rating
updates.
Duff & Phelps used
the following:
AAA
Highest claims paying ability. Risk factors are negligible.
AA+, AA, or AA-
Very high claims paying ability. Protection factors are strong. Risk is modest, but may vary slightly over
time due to economic and/or underwriting conditions.
A+, A, or A-
High claims paying ability. Protection factors are average and there is an
expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, or BBB-
Below average claims paying ability. Protection factors are average. However, there is considerable variability
in risk over time due to economic and/or underwriting conditions.
BB+, BB, or BB-
Uncertain claims paying ability and less
than investment grade quality. However,
the company is deemed likely to meet these obligations when due. Protection factors will vary widely with
changes in economic and/or underwriting conditions.
B+, B, or B-
Possessing risk that policyholder and
contract holder obligations will not be paid when due. Protection factors will vary widely with
changes in economic and underwriting conditions, or company fortunes.
CCC
There is substantial risk that policyholder
and contract holder obligations will not be paid when due. Company has been or is likely to be placed
under state insurance department supervision.
Weiss Research, Inc. Rating System
Weiss is based on a rating system that
should "flag potential problems in such a way that the average consumer
will be adequately informed in a timely fashion."
Weiss developed a proprietary computer model
that uses some 200 ratios derived from 750 pieces of data to determine an
insurer's rating. They do not meet with
managers or other executives for the rating.
Data for these calculations come from the statutory reports insurance
companies submit to the insurance commissioners, plus supplemental data from the
companies themselves. Weiss Research
receives quarterly reports from the insurance companies. New information is added to the analytical
process and is reported in quarterly updates.
The results of the analysis and the ratings
are sent to the companies with a request that the data be examined and
verified. Some insurance companies do
not respond to these requests. Others
object to the rating received. Still
others object so strenuously that they threaten lawsuits. Weiss Research, Inc. can be contacted at:
PO Box 109665
Palm Beach Garden, FL 33410
(800) 289-9222
Each rating can be given a (+) or (-)
sign. The plus sign is an
indication that with new data, there is a modest possibility that this company
could be upgraded. The A+ rating is an
exception since no higher grade exists.
The minus sign is an indication that, with new data, there is
modest possibility that this company could be downgraded.
A (Excellent)
This company offers excellent financial
security. It has maintained a
conservative stance in its investment strategies, business operations and
underwriting commitments. While the
financial position of any company is subject to change, we believe that this
company has the resources necessary to deal with severe economic conditions.
B (Good)
This company offers good financial security
and has the resources to deal with a variety of adverse economic
conditions. However, in the event of a severe
recession or major crisis, we feel that this assessment should be reviewed to
make sure that the firm is still maintaining adequate financial strength.
Important Note: Carriers with a rating of B+ of higher are included on
our Recommended List.
C (Fair)
This company offers fair financial security
and is currently stable. But during an
economic downturn or other financial pressures, we feel it may encounter
difficulties in maintaining its financial stability.
D (Weak)
This company currently demonstrates what we
consider to be significant weaknesses which could negatively impact
policyholders. In an unfavorable
economic environment, these weaknesses could be magnified.
E (Very Weak)
This company currently demonstrates what we
consider to be significant weaknesses and has also failed some of the basic tests
that we use to identify fiscal stability.
Therefore, even in a favorable economic environment, it is our opinion
that policyholders could incur significant risks.
F (Failed)
Company is under the supervision of state
insurance commissioners.
Additional Notations:
SA SB SC SD SE (Smaller Companies)
The S designates companies with less
than $25 million in capital and surplus, excluding companies with more than
$500 million in admitted assets regardless of the capital and surplus
levels. It does not reduce or diminish
the letter grades A through E.
The S is simply a reminder that consumers may want to limit the
size of their policy with this company so that the policy's maximum benefits
per risk do not exceed one percent of the company's capital and surplus.
U (Unrated Companies)
This company is unrated for one or more of
the following reasons:
(a)
total assets are less that $1 million,
(b)
premium income for the current year was less than
$100,000, or
(c)
the company functions almost exclusively as a holding
company rather than as an underwriter.
Standard Analytical Services
This rating service gives a descriptive
report of a company relative to the so-called "25-giants" of the
insurance industry. The pamphlet handed
out looks very similar to the one provided by A.M. Best. Mostly companies that do not receive a
favorable rating from A.M. Best buy it.
Professionals question the credibility and usefulness of this pamphlet.
What Do All These Letters and Numbers Mean?
Obviously
A+ under Bests system is better than their rating of C. That much is easily understood. The Best rating system follows what people
are already accustomed to: a system of letters and combinations of numbers and
letters. Standard & Poors system
also uses letters. Since their system
is less detailed some prefer it.
Whichever system is preferred, all rating companies should be used,
comparing the different companies views.
Rating
insurance companies is not an exact science.
While those who do so are very experienced in the industry, there are
still variables that make part of the process a prediction. In fact, the statement made by Standard
& Poor is important to note: Although many of the tools that financial
analysts use to evaluate insurers are very precise just like the medical tests
used by a doctor, the conclusions that analysts reach from studying these
results are a matter of judgment.
Many
agents prefer to represent only companies with the highest ratings from two or
more companies. While companies with
lower ratings often have superb records in claim payments and other
obligations, it is understandable why agents might prefer to stay only with the
top companies. Agents must look at the
data and reach their own conclusions just as analysts do when they look at the
information.
Claims
paying abilities and other obligations will certainly be linked to the
companys financial strength. A company
that is struggling may look for ways to maximize their funds. Delaying the payment of claims, commissions,
or other obligations might do this.
End of Chapter Three
United Insurance
Educators, Inc.