Insurance Consumer Protections

During these financially uncertain times there is increased attention focused on the security and operation of the corporate institutions that hold and protect our money. Now more than ever, it's important to know how insurance works—industry regulation, consumer protections, profit margins, company investment practices and the overall financial stability of the insurance industry.

The good news is that your car, home and business insurance is highly regulated and there are multiple layers of safety nets that protect consumers' insurance policies and help guarantee that claims get paid. In addition to government oversight, states have guaranty funds that insurers pay into that help protect policyholders in the unlikely event that an insurance company fails.

Insurance Regulation & Oversight

• Insurance companies are regulated by state insurance departments that closely monitor the financial strength of insurers doing business in their states. Each state insurance commissioner requires companies to disclose and file annual financial statements that demonstrate company solvency and the ability to protect policies and pay claims.

• It is essential for insurance companies to maintain healthy profit margins and strong claim reserves to remain solvent during cyclical economic times, market volatility and in anticipation for high claim payouts in the event of large natural and man-made disasters (hurricanes, wildfires, terrorism, etc.).

• Research shows the main reasons for an insurance company failure are inadequate pricing and misestimating the amount that should be set aside to pay claims – not investment problems.

• State regulators have repeatedly stressed that the insurance system is financially sound.

• Independent insurance rating agencies also closely scrutinize the financial strength of individual insurance companies and make their rankings available to the public. A.M. Best Company | Standard & Poor's Rating Group

• In the recent case of AIG, the troubled non-insurance financial products subsidiary of a holding company required the rescue of the holding company, even though its insurance company subsidiaries regulated at a state level were, and continue to be, financially sound.

Insurance Consumer Protections

• In the unlikely event of an insurance company bankruptcy, there is a system in place to pay claims. The state guaranty fund system was created 40 years ago to protect consumers' policies and fund claims payments.

• State guaranty funds are financially supported by the insurance industry and do not involve taxpayer dollars. Click here to download the National Conference of Insurance Guaranty Funds' (NCIGF) Insolvency Trends - Winter 2014 report.

• Since 1976, there have been about 600 insolvencies of auto, home and business insurers. In total, the guaranty system has paid out about $21 billion. $10 billion has been paid out in the last six years.

• A separate guaranty fund system also exists for life, health and annuities.

• Insurance is a very competitive business. There are many choices for consumers when shopping for an insurance policy. It is also very easy for a concerned consumer to switch to another auto, home, business or life insurance company.

Insurance Company Investments

• While the investment environment remains volatile, the financial assets of the industry are very conservatively invested, with nearly two-thirds of funds in highly rated corporate and government bonds. About 20 percent of the industry's portfolio is in stocks.

• The insurance industry is not suffering from a credit or liquidity crisis. Unlike many of the banks and other financial companies that have struggled, insurance companies, in general, do not borrow to make investments. Nor do they borrow to pay claims. So, even when some investments perform poorly, the effect isn't magnified as it is when investments are highly leveraged.

Insurance Industry Financial Strength

• The finances of the insurance industry remain fundamentally strong.

• The industry's financial strength – as measured by the excess of an insurance company's assets above its legal obligation to its policyholders – to a record $653.3 billion as of December 31, 2013—up $66.3 billion, or 11.3 percent, from $587.1 billion as of year-end 2012.

• It is essential to maintain strong claim reserves in anticipation of high insurance payouts, particularly natural and man-made disasters.

• Profitability in the property/casualty insurance industry surged to its highest level in the post-crisis era in 2013 as sharply lower catastrophe losses, modestly higher premium growth, improved realized investment gains and favorable prior-year reserve loss development coalesced to push the industry's return on average surplus to 10.3 percent, up from 6.1 percent in 2012 and just 3.5 percent in 2011. The effect: the industry combined ratio in 2013 fell to 96.1, down from 102.9 in 2012, leading to an underwriting profit of $15.5 billion—a necessity in an era of persistent, ultra-low interest rates (despite some increases in longer-term yields late in the year). The industry's bottom line benefited commensurately as overall net income after taxes (profits) for the year surged by 81.9 percent to $63.8 billion from $35.1 billion a year earlier.