There has been a dramatic change in people’s attitudes about their money. Investors have begun seeking ways to eliminate risk and preserve long-term, guaranteed growth. When people seek safety and protection, they often consider utilizing the services and guarantees of the American Insurance Industry. For many years, people have considered annuities to be a safe haven for their life savings. The following outline highlights reasons why annuities and insurance companies are so safe.
The US insurance industry is truly one of the tightest regulatory environments in the world. Each state has a Department of Insurance (DOI) regulating insurance activity in their respective state. Your DOI is keeping an eye on the operation and solvency of each insurance company that does business in your state. The same holds true if that same insurance company is approved to do business in another state. In other words, your DOI is not the only one watching over the insurer. Every state the insurer does business in has another DOI looking over their shoulder as well. This creates a truly remarkable level of supervision to catch potential problems early in some of the following key areas:
Capital & Surplus Requirements: Insurers use capital and surplus as a buffer to finance growth and pay for emergencies and other business commitments. Each state specifies a minimum dollar amount for required capital and surplus that each insurer must maintain.
Risk Based Capital Ration (RBC): This sophisticated formula allows regulators to evaluate whether the insurer maintains sufficient capital in relation to the relative risk within the insurers operations. Each year, the RBC levels for each company are reported to the National Association of Insurance Commissioners (NAIC) and the state where the insurance company is domiciled. These ratios are then compared to the standards set by the NAIC for monitoring. The NAIC prescribes action based on six categories within the levels of performance for the RBC ratio.
Solvency: Annual Statements are filed with every state where the insurance company is licensed to do business along with a copy sent to the NAIC. This allows for a thorough annual review of overall solvency within the company.
Other Ratios and Formulas: The Insurance Regulatory Information System (IRIS) is a system that has been developed to monitor financial conditions and prevent insolvency within an insurer. There are a total of 12 financial tests performed within the IRIS. The Financial Analysis and Solvency Tracking (FAST) system was created for additional analysis of larger insurers. The FAST system is applied to review the insurance company’s financial status every three years. The FAST system reviews both current financial records along with the review of the company’s 5-year history.