CAR & AUTO INSURANCE : Will Insurance Companies Save on the Financial Storm?

Although the stock market seems to have stabilized somewhat with the announcement of President-elect Barack Obama's economic team, there is still considerable uncertainty around the economy. Other than AIG, no insurance companies have requested a bailout, but now that the Treasury Department has changed the focus of the $700 billion economic bailout package, insurance companies may seek funds if they also own a bank. And, many people are speculating about federal regulation of the insurance industry, which is currently state-regulated.

The Current Situation
With so many companies declaring bankruptcy, going out of business, or being sold or taken over, it seems that no industry is safe. Add to that the problems of American car companies and the picture looks bleak and uncertain indeed. Does all of the economic turmoil mean you need to worry about your insurance policies and your insurance company? Because of the strict state regulation of insurance companies, your insurance policy is one of the safer financial products available, and your insurance company is probably safe as well.

Insurance Company Regulation and Structure
How is it possible that insurance policies and companies are secure, given that some insurance companies seem to be in financial distress? What most people think of as an insurance company is really just a parent company, or holding company, for the insurance subsidiary company you actually do business with. The company that is licensed in your state to sell you an insurance policy is regulated very strictly by the state government. That subsidiary insurance company has strict legal restrictions on how they invest their money (which is your insurance premiums) and the amount of money—called a loss reserve—they have to maintain to pay future insurance claims. The parent company is not subject to these same state regulations. Instead, they are subject to looser federal regulations, which are similar to those for other publicly traded companies.

What State Regulation Means
In addition to the protections described in our article, "Insurance and the Banking Crisis - What's the Risk to Me?" state regulation means that the Commissioner of Insurance in each state is responsible for determining whether there are any financial problems with the insurance subsidiary companies licensed in the state. The news about bailouts and insurance companies most likely does not relate to the individual company issuing your car insurance or life insurance policy. Additionally, although it's possible for a parent company to give its subsidiaries access to its assets in order to pay claims or supplement their loss reserves, state regulations almost always prevent the reverse situation. This means that even if the parent company fails and declares bankruptcy, the assets and loss reserves of the subsidiary companies will not be available to it. In that event, the biggest change you would likely experience as a customer would be the sale of the insurance subsidiary to another strictly-regulated insurance company.

Government Bailout and Actions
The effect of state regulation of the insurance industry is that insurance subsidiary companies are at less financial risk than most other companies, including major corporations and stores that are closing or facing bankruptcy. Federal regulation of the insurance industry would not solve any of the current problems, especially since the insurance companies themselves are not in trouble. Regulatory reform may be necessary, but state insurance regulators are nearly unanimous in stating that federal regulation would merely complicate the current successful system.

The good health of insurance subsidiaries does not mean that other industries are not in trouble, however. The American auto industry, already the focus of a $25 billion government subsidy aimed at boosting development and production of hybrids and other fuel-efficient cars, is now seeking more money to help with their declining financial strength. Besides carmakers' effect on the economy in general, their continued existence affects insurance, as well. After all, it's hard to have car insurance without cars!

What to Look For
State regulation of insurance companies does not mean that all insurance companies are equal, however. It's still important to check the financial strength ratings of a company from A.M. Best or another independent rating agency. When viewing ratings, be sure to check the financial strength ratings. Other ratings—such as stock ratings and credit ratings—provide information for investors, but have little relevance regarding the ability to pay claims. In general, if your insurance company has a good financial strength rating and you have had a good experience with them, you have little reason to worry about your policy or switching companies.

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