Why Life Insurance Company Ratings Matter
Who exactly is making a large financial promise to the family?
In 2011, M Financial published a bulletin taking a look at both the how to and the importance of assessing the overall strength of life insurance carriers. As the bulletin points out:
"The life insurance industry is among the most heavily regulated industries doing business today. In an effort to protect policyholders, life insurance companies are subject to conservative rules and requirements that involve, among other factors, how companies manage their finances and support the products they issue to customers ... Embedded within life insurance policies are long-term, intangible financial promises not found with most other financial or consumer products."
The challenge then becomes how to interpret the ratings and understand what the differences mean. When weighing the company selection decision, the implementation stage of a life insurance strategy, it is critical to be sure that advisor bias be removed from the equation. Ratings are one way to address this. The critical factors that need to be addressed, as the bulletin highlights, are:
The Insurer's Business Profile, or Why Is This The Right Company For This Client (Market) And This Strategy?
The business profile factors are intended to capture those characteristics that reflect the life insurer's presence in the market. These factors are more subjective than are the financial factors. Insurers that have sustainable competitive advantages in terms of market position and brand, distribution, and product focus and diversification, can be expected to be able to maintain and enhance future profitability and financial strength.
- Factor 1: Market Position and Brand
- Factor 2: Distribution
- Factor 3: Product Focus and Diversification
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