To Insure or Not to Insure?
Ever since the realization of a global economic recession, television and print news are plagued with announcements of companies closing, mass dismissal of employees, cutting down of work hours, and many others. Amongst the companies that are badly affected, are pre-need companies. This may be so because a greater proportion of pre-need or insurance companies’ income comes from investing policy holders’ money. If this money is invested in erroneous companies on the downfall, then the collected premiums are at a risk as well as the insurance company itself is at a front for liabilities and debts.
Insurance companies have a long and colorful history. It is said that insurance appeared simultaneously with human society. Throughout various civilizations, men have found ways in order to insure their goods and products. A brief look in the history of mankind would show us that, it was only after the Great Fire of London in 1666, which has destroyed over 13,200 houses, has the insurance industry evolved as we know it today.
The sense of responsibility and safety that insurance companies provide us are the reasons why we find it irresistible to employ their services. How then may we avoid such setbacks as bankruptcy and closure of companies, inevitably resulting to the loss of our hard-earned money as well? Here are some tips to guide you in choosing the companies where you would be assured to invest your money.
• Leverage. One of the first things that you need to check when mulling over an insurance company is the quality and strength of their balance sheet. Everyday insurers are taking in premiums and paying out claims to policyholders. The ability to meet their obligations is extremely important. Companies should strike a balance between high returns while keeping its leverage intact. However, a company that is highly leveraged might not be able to meet financial obligations when a large disastrous event occurs. If that occurs, three things act to increase leverage: writing more insurance policies, dependence on reinsurance, and use of debt. Reinsurance allows a company to bypass some of the risk exposure to other insurers (usually a good thing), but be watchful. Too much dependence on reinsurance means that the company is not keeping a fair portion of responsibility for each premium dollar.
• Liquidity. The first test of an insurer’s ability to meet financial obligations is the acid test. It tests whether a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities. Also take a close look at cash flow. An insurer should almost always have a positive cash flow. Other things to keep an eye on are the investment grades of the company’s bond portfolio. Too many high and medium risk bonds could lead to instability.
• Profitability. As with any company, profitability is a key determinant for deciding whether to invest. For an insurance company, there are two components of profits that we must consider: premium/underwriting income or any revenue derived from issuing insurance policies, and investment income.
Other factors, such as interest rate fluctuations, must also be taken into consideration. This is actually a major item that affects the performance of an insurance company. Insurance companies invest much of the collected premiums, so the income generated through investing activities is highly dependent on interest rates. Declining interest rates usually equate to slower investment income growth. Another downside to interest rate fluctuations (not exclusive to insurance companies) is the cost of borrowing.
Taking note of all the information mentioned above, the one problem one would find with analyzing insurance companies is that the disclosure usually isn’t enough. Insurance companies do not really have their financial statements open for public viewing. There are ratings of insurance companies that are available over business websites. This may be helpful as well for people who are considering which company to go to.
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