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What You Can Do About Insurer Insolvency (Part 1 of 2)

Mission. Integrity. Ideal. Excalibur. Universal. Enterprise. Great Global. American Excel. Champion. Adjectives for the Virtual University? Nope...names of companies that used to insure millions of individuals, families and businesses. Perhaps you were affected in some way by these or other insolvencies because you were blind sided when they went belly up. There are proactive steps that you can take today to protect yourself and your clients.

If you've ever taken a time management course or read a book on the subject, you probably learned about focusing your efforts within a "priority grid" established by Importance and Urgency. The experts say that most of your time should be focused on tasks and issues that are "Important, but Not Urgent"...i.e., on the critical functions that affect survival and success.

The same can be said for the attention you give to monitoring the financial stability of carriers used to place direct and brokered business. With more urgent tasks at hand, it is too easy to ignore warning signs that can reveal themselves with minimal effort. In this article, we'll look at ways you can protect yourself and your clients from insurer insolvency, including a handy downloadable tool that streamlines the process.

General Jimmy Doolittle once said, "One trouble with Americans is that we're fixers rather than preventers." Although numerous articles have been published on the subject of insolvency, most of them have been retrospective in nature..."here's what happened and why". This approach does little to "fix" the problem and even less to "prevent" its reoccurrence.

The purpose of this article is to provide you, the independent agent, with a practical methodology for examining the ongoing financial stability of your carriers and taking corrective action as warranted. While this approach cannot prevent an insolvency, it can help minimize the likelihood that you and your clients will become an active participant.

Legal obligations to clients

Your first question may be, "Why should I bother?" You've got E&O insurance (that hopefully covers insolvencies), your state has a guaranty fund, the Texas Higginbotham court case [Higginbotham & Associates, Inc. v. Greer, 738 S.W.2d 45 (Tex. App. 1987)] said you weren't liable, and so on. To answer a question with a question, would you suggest to your insureds that they rely on only one, limited risk management technique to address their exposures to loss?

Not only that, but the Higginbotham case did not totally absolve agents of all responsibility for carrier insolvencies. In fact, the court stated, "We...conclude that an agent is not liable for an insured's lost claim due to the insurer's insolvency if the insurer is solvent at the time the policy is procured, unless at that time or at a later time when the insured could be protected, the agent knows, or by the exercise of reasonable diligence should know, of facts or circumstances which would put a reasonable agent on notice that the insurance presents unreasonable risk." [emphasis added]
In other words, failure to exercise reasonable diligence in ascertaining financial stability may place the agent at risk. As the roman statesman Cicero said, "The safety of the people shall be the highest law."

Financial information sources

Financial data on companies is widely available from fee services such as A.M. Best, Standard & Poor's, Moody's Investors Services, Duff & Phelps, Weiss Research, and others. In addition, supplementary and/or subjective information may be obtained from company annual statements and stockholder reports, insurance departments, trade periodicals, other agents, and numerous ancillary sources. Because the scope of this article is necessarily limited, we will examine the use of information readily available from the A.M. Best company, specifically Best's Insurance Reports (P/C).

Insolvency Checklist

The approach presented in this article relies on an insolvency checklist that incorporates financial data from A.M. Best and subjective observations of company behavior by agency personnel. Although numerous checklists have been published, most require complex calculations of numerous Best or NAIC ratios and financial indicators. What differentiates this checklist from others is that it requires a simple Yes/No answer to 23 or fewer questions.

Click on the links below to download and/or open the front and back pages of the checklist:

Insolvency Checklist (front)

Insolvency Checklist (back)

In Part 2 of this article, we'll use a real insolvency to illustrate how to use the checklist to monitor certain insolvency indicators for your carriers on an ongoing basis. And, we'll include a FREE downloadable manual that explains the issues and concepts behind this monitoring approach, including a number of E&O steps you can take to reduce your exposure to loss.

Important Disclaimer: This checklist is a tool for documenting financial and marketing information about property and casualty insurance companies for the purpose of establishing due diligence in the event of errors and omissions claims against agents. It is not a predictor nor guarantor of financial condition, and no warranties, express or implied are made.

Continue with Part 2