Insurance companies consider many factors before determining a rate for an individual’s life insurance policy. When you apply for life insurance, your health and any lifestyle risks will be taken into consideration to help better assist the insurance company. But have you considered the health of the life insurance company?
Like any other business, life insurance companies are rated on their performance, profitability, service and other elements.
These ratings include important information about an insurance company, which measures their financial health, and also provides consumers with a way to compare one company’s fiscal well-being with others.
Essentially, risk-based capital or RBC represents an assessment of risks that a company should maintain to protect its customers against unfavorable developments. The purpose of the RBC calculations and comparisons is to help identify the risk for a life insurance company’s future failures and losses.
There are four categories of risk-based capital:
- The first, Category-1, or C-1 calculates the value of a company’s assets and liabilities.
- C-2 risks calculate undesirable trends in life insurance mortality and diseases.
- C-3 measures the level of risk inherent in actuarial opinion, meaning a company’s calculation of life expectancy of its policyholders.
- C-4 measures potential risks such as a company’s management incompetence, fraud, or vulnerability to litigation.
It is important to know the ratings of a company selling an insurance product to ensure that the company will be able to fulfill the promises they make. There are several rating systems from which to choose, for example, Comdex.
“I tend to recommend companies with a Comdex rating of 90 or higher,” said Brian Ashe, President of Brian Ashe and Associates, Ltd. in Lisle, Ill., and Treasurer of the Life and Health Insurance Foundation for Education (LIFE). “Comdex combines all the ratings to help individuals in their comparison of companies.”
Companies that publish financial strength ratings of insurance companies include A.M. Best, Standard & Poor’s, Fitch Ratings, Moody’s and Duff & Phelps.