There's No Better Time For Insurance

As the Wall Street crisis unfolds, insurance policy holders might be asking themselves if the premiums they are paying for their coverage are going to do what are supposed to do: protect them from risk.

The better question may be what type of risk policy holders would face if they stopped paying those premiums.

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"Insurance is a good bet," says Mike Barry, vice president of media relations at Insurance Information Institute, a group that provides information on the insurance industry. “For the premiums you pay for the coverage you receive, it remains a very cost effective feature.”

But can that hold true with the likes of an AIG, the nation’s largest insurer, and its recent bailout by the government? Is the health of the insurance industry a risk in itself?

“Most insurers are in good shape,” says Robert Hunter, director of Insurance at the Consumer Federation of America. “Their balance sheets are strong as we’ve seen record profits from 2004 to 2006.”

However, that doesn’t mean that policy holders haven’t been concerned about the fate of their insurance companies.

“We did have a high level of anxiety,” says Dave Evans, senior vice president at the Independent Insurance Agents and Brokers of America. “It was a credibility issue and people are seeing the interconnectedness of the financial system, especially when it came to annuities.”

Insurance agent Tom Minkler of the Clark-Mortenson Agency in Keene, New Hampshire says he's had a few calls from worried customers.

"We are telling them to stay put and that there are lots of reasons not to change companies," says Minkler. "The companies are fully assured for life and property. AIG has to be separated from the rest."

Safeguards And Trouble Spots

Hunter agrees, saying,  “People were worried after the AIG takeover but there are safeguards in place that should help ease that worry.”

One of the main safeguards Minkler mentions is the state guaranty associations, which back policies, depending on the limit set by each state, up to $500,000. That’s for all individual policies, including life, auto, and home.

But Hunter acknowledges that most people aren’t aware of that fact. “The government should do a better job of getting the word out to policy owners about the state guarantees and how they work,” he says.

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The insurance business may have a conservative reputation, but the business has changed dramatically in the last decade, as AIG's troubles suggest.

The Gramm-Leach Bliley Act of 1999 liberalized the financial services sector, blurring the lines between banks, insurers and investment banks.  Since then, investment-like products, such as annuities—tax deferred vehicles with recurring periodic payments—have become one of the more popular selling insurance items.

Even in today’s economic chaos, those annuities are in mutual fund-like accounts and are mostly protected as they are separate from funds insurers use to pay off benefits.

“People are being told their annuities are safe,” says Evans, but he admits, “Going forward, where is a safe place with the market the way it is?”

House And Home

Perhaps one huge blip on the radar screen is homeowners insurance and how it’s affected by the thousands of foreclosures with premiums not being paid. “Banks would pay the insurance on a foreclosed home,” says Barry.

That’s one element of pressure on the banks and why they are anxious to re-sell them but Barry says the money is not all that much in the big picture. “It’s probably around $900 a year for a home of some $250,000 re-built value,” says Barry.

But current homeowners do face problems when it comes to getting certain coverage, especially flood insurance. Reports out of Louisiana cited residents there without auto or flood coverage would have to wait until after Hurricane Gustav hit, to be able to try and buy it.

And rates for homeowner’s insurance in the Gulf Coast have risen as much as 12 percent since the area was hit in 2005 by the Hurricanes Katrina and Rita. One “life saver” of sorts for homeowners: low interest loans are available to them if their home is in a federally declared disaster area.

Of course, the economic situation for insurance companies and policy holders can change for the worse, according to Minkler. "If credit ratings for the companies go down or or bridge loans are not paid, that's something substantial to look at," says Minkler. "We're keeping an eye on that."

Whatever policy holders feel at this point in time, most agree that looking at your current policy and looking at the overall market can only help.

“Take time to shop," says Hunter. "This is a good time to look around. “Just don’t over reach when it comes to what you can afford.”

Barry says there are more opportunities for consumers. “Auto insurance rates have gone down on average the last three years,” he says. "There’s a lot of competition out there. Take advantage of it.”

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