A typical consumer has no idea as to how to determine if a particular insurance company will be around to make its financial commitments when it is needed. They may rely upon the Department of Insurance, but many people do not even know how to contact them. When a person is purchasing an annuity, usually there is a considerable amount of cash involved that will be sent to the insurer with the “promise” that certain amounts will be paid, and/or investments will be made on behalf of the annuity owner. When an investor uses Certificates of Deposit for investments, there is the government guarantee of liquidity within certain limits, but with an insurance company a prospective client (or “investor”) would be negligent if they did not inquire as to the financial standing of the insurance company that has received their hard-earned funds. They are not comfortable knowing that their funds are going to be co-mingled with assets of other annuity holders. Variable Annuity funds are not co-mingled with the insurer’s funds, so owners of Variable Annuities do not have this concern.

A professional will carry information with them from at least one of the rating services giving the rating of the annuity carriers that he/she represents. This information is available from most public libraries, and a professional adviser will maintain the necessary information so if they do not have them at point of sale, then can supply the client with this very necessary information immediately thereafter. The client (investor) can also make inquiries of the financial planner, broker, or agent to find out whether he or she is dealing with a full-time, professional adviser.

The general areas that can be furnished to the investor by rating services are:

1.company rating,

2.claims-paying ability,

3.annual statements, and

4.the investment portfolio.

Company Rating

Perhaps the best known of the rating services is A.M. Best. Most agents have a copy of Best Agents Guide to Life Insurance Companies. A.M. Best Company reviews the financial status of thousands of insurers and rates them on their financial strength and operating performance based on the norms of the life and health insurance industry. The Best Company has been in business since 1899 and started rating insurers in 1906. In 1934, Best stopped its alphabetical ratings (A+, A, etc.) and began a rating system based on general descriptions measuring the performance of each company in the areas of: competency of underwriting, control of expenses, adequacy of reserves, soundness of investments, and capital sufficiency.

In general, a prudent investor should only consider the top four categories, particularly with fixed-rate contracts. There are no advantages in dealing with a company that has a B++ or lower rating. Variable Annuities, on the other hand, do not co-mingle their accounts and some financial advisors believe that lack of solvency or bankruptcy does not affect the value or integrity of Variable Annuity investments. However, to be realistic, if an insurance company goes bankrupt, it is possible that the return on variable contracts might be frozen by a purchaser of the contracts or by the Department of Insurance. In any event, the “prudent” investor would want to avoid any such eventualities, even though remote.