I sometimes see questions about AM Best ratings, and frequently get questions about life insurance company strength. Trying to determine the strength of a company based on Best ratings and size is a futile endeavour in my opinion.
AM Best is an American company that comes in and evaluates insurance companies. They then assign them a letter like A+ or B-. I take it we’re to assume that this is indicative of the future strength and stability of the company right? Well, maybe not so right. AM Best seems to disagree with that premise, from their web page:
These ratings are not a warranty of an insurer’s current or future ability to meet its contractual obligations, nor are they a recommendation to buy, sell or hold any security. A.M. Best Company is not engaged in the offer or sale of any security and does not provide investment advice of any kind. Further, any and all ratings, opinions and information contained herein are provided “as is,” without warranty of any kind, express or implied. A.M. Best receives compensation for its interactive financial strength ratings from insurance companies it rates.
So what are they implying or saying with the ratings? I’m not sure. But they’re for sure explicitly telling you they’re not suggesting you use it as a warranty of future strength. In fact two weeks before Confederation Life went out of business they enjoyed AM Best’s top rating. So I certainly don’t suggest that you disagree with them and start buying life insurance based on AM Best ratings.
Now, this isn’t to slam AM Best. It’s a fine company (really it is. I speak from first hand experience. They’re great folks). But the perception by consumers and agents (who I think to some extent use these ratings to justify the sale of ‘their’ company over another) should probably be changed.
In addition, I’d suggest you have another look at the last line of the above quote. Yes, that one that talks about cash changing hands. Yes, the insurance companies pay AM Best for ratings. Well, not all do. Some don’t pay AM Best for ratings and as a result don’t have an AM Best rating. And all that means is that they’ve decided not to pay AM Best. Nothing else should be taken from that.
As for an agent determining that an AM Best rating is good or bad, there’s nothing in an agent’s training that qualifies them to understand it. Even many actuaries would have to do some real head scratching to get a handle on what’s going on with the underlying calculations of the ratings.
And of course, there’s even more factors to consider that in my opinion have a lot of bearing on whether a company would end up in a situation where they couldn’t pay a claim.
First, many Canadian insurance companies are owned or offshoots of larger US international companies. Has the parent company agreed in writing to back any problems with it’s Canadian subsidiary? It’s my understanding that some do, some don’t. So if you’re dealing with Big Company A and they go bust but are not backed by their Monster US Company A parent, then being a household name didn’t help anything. But if Small Company B is actively backed by it’s parent company, and Small Company B goes out of business you’re still safe because it’s US parent is going to look after you. Shouldn’t that be of more concern than a letter rating?
Secondly, many companies deal with reinsurance companies (and I think perhaps the reinsurance companies may be incestuously related back to some of the insurers). So if you buy $500,000 of life insurance through a small company (or even a big one - they almost all do this), they may keep $100,000 of the risk and pay the reinsurance company part of your premium to be on the hook for the remaining $400,000. If that’s the case, are you better off with a company where your life insurance would be paid $100,000 by them and $400,000 through some huge international reinsurance company, or would you be better off with a company that is on the hook for the full $500,000? Tough to say, but I think we could make the case that the small company sharing out the risk isn’t a bad thing for us.
Now there’s another wrinkle. In Canada we are fortunate to have Assuris. This is an association of most of the life insurance companies in Canada and they jointly guarantee your life insurance benefits up to a certain amount (generally speaking, the greater of $200,000 or 85% of your insurance). So unless the whole industry goes belly up the worst you’re likely to lose is 15%. Not great, but probably not entirely catastrophic.
But here’s the real kicker. There’s never been a consumer in the history of Canada lose a dollar on life insurance death benefits. Not ever. The two times a company has gone out of business, the other companies scooped up their blocks of business. They did this I think partly so that I can continue to state that nobody’s ever lost a dollar. The strength of the industry is important to the industry.
So how’s a consumer to judge? Agents aren’t qualified. There’s no easy yardstick to measure stability. Reinsurance treaties and agreements with parent companies muddy the waters. And we’ve got Assuris backing us up anyway. Well, it’s my belief that for the most part consumers should not concern themselves with this. The industry is highly regulated by the government as well and while we can disagree that the government does a good or bad job on many other things, it’s my opinion that they watch the financial industry very closely.
Here’s my take on this. First, I believe the life insurance industry in Canada is solid and there’s little reason for most of us to make strength a factor in our buying decision. Secondly, we have the guarantees of Assuris backing us. If you shop out the companies by their rates (which you can do in the top right hand corner of this website), see who comes in the least expensive. If there’s a larger company that’s just a dollar or two more than a smaller company, and if you feel comfortable paying that extra couple of bucks to get a big company, then I think you should do so. If you’d prefer to save the couple of bucks, I think that’s a great idea too. Just be aware of what it is you’re doing (i.e. don’t discount other companies just because of some vague reference to ‘A+ companies’ or some other malarkey).
If you have a large policy you’re shopping out, then just to be squeaky safe I would suggest considering the larger companies. And you might consider splitting the policy up amongst a few life insurance companies. But that’s about as far as I would get concerned with strength.
The Canadian life insurance industry in my uninformed opinion is rock solid. I’m not in the least worried. In fact, my personal insurance is with a smaller company.