If a coin comes up tails 100 times in a row, is it more likely that the next toss of that same coin will be heads? The answer is no. Since, as they say, “a coin has no memory,” the first 100 tosses do not change the fact that the probability on the 101st toss remains at fifty percent. Though significantly more complex, the insignificance of past events when calculating the probabilities of future events also applies to hurricanes.
In a previous article, we discussed the importance of purchasing insurance from a financially secure insurance company. At that time, the devastating hurricane seasons of the mid-2000’s were fresh in our collective memory, and many homeowners were in a rush to get “their house in order.”
Unfortunately, some homeowners did not properly value the financial strength of their insurance company before purchasing their policy. Rather than consider the financial strength of a prospective insurance company, many homeowners focused on the premium. As a result, many of those who suffered hurricane damage were unable to collect on their insurance policies because their insurance company became insolvent.
Unfortunately, the relative tranquility of the past few hurricane seasons has caused many to drop their guard, particularly in the context of purchasing homeowners’ insurance from financially strong companies. However, as mentioned above, the relative calm of the recent past does not guarantee the absence of hurricane risks in the future. Consequently, as with periods of heightened hurricane activity, insuring with financially strong insurance companies remains critically important.
Although there are no guarantees that a particular insurance company will remain solvent, it is commonly understood that financially strong insurance companies are more likely to meet their ongoing obligations to policyholders than financially weak ones. Unfortunately, for the average consumer, determining financial strength may be difficult. However, there are resources available to assist consumers with this task.
A.M. Best*reg;, a company that evaluates and rates the financial health of insurance companies, conducts independent evaluations to form an opinion regarding an insurance company’s financial strength. Based on an evaluation of an insurance company’s balance sheet, operating performance, and business profile, A.M. Best issues its “Financial Strength Ratings,” which have been recognized as a benchmark for assessing an insurance company’s financial strength. The Financial Strength Ratings assign letters to convey A.M. Best’s opinion for a particular insurance company—from Superior (A++) to In Liquidation (F).
While there are other rating agencies, consumers should understand that each agency may use their own standards, processes, and methods to rate insurance companies. So, it is important to understand that not all “A” ratings are necessarily equal. Consumers should investigate not only the methodology used by their rating agency of choice but also its reputation in the insurance and financial industries. As usual, the more information insurance consumers obtain at this stage of the purchasing process, the better off they will likely be.
Regardless of which system is used, it is important to note that a rating is not intended to be a guarantee of an insurance company’s financial strength. Nevertheless, the wisdom of considering a prospective insurance company’s financial strength should never be dismissed, and at least a cursory review of the insurer’s financial rating should be undertaken.
To understand the significance of an insurance company’s financial strength, one need only note the number of insurer insolvencies over the past few years despite the relative lack of hurricane claims. How would a homeowner have fared with such financially weak insurance companies if there had been a hurricane?
Conceptually, an insurance company’s ability to pay the claims of its policyholders is fundamental to the underlying purpose of insurance. The significance of premiums, deductibles, coverage limits, policy terms, and exclusions virtually vanish when the prospect of insurer insolvency surfaces. After all, what difference does the amount of the deductible make if there is no money to pay a claim?
If you would like more information about the opportunity to insure your home and other property with a financially secure insurance company, please contact us.