Your insurance policy is — probably — safe

After the Federal Treasury announced its $85 billion bail-out of American International Group last week, many consumers wondered if their insurance policies were safe.

AIG requested the massive loan because of a cashflow crunch, due to bad investments in mortgage derivative products, which could bankrupt its insurance assets. The U.S. Treasury granted the loan, because a collapse of the nation’s largest insurance company would affect too many American policyholders and threaten financial markets worldwide, said Treasury Secretary Henry Paulson.

But is your insurance policy safe?  The short answer is, experts said, yes.

“There’s no reason to panic or pull your policy out of AIG, because the (insurance) companies are secure,” said Melissa Gannon, vice president of insurance and bank ratings at thestreet.com, an investment information site.

Other insurance companies also seem to be safe. “You can’t leap to the conclusion that because AIG is having this problem, it will go into other insurance companies,” said Gannon. 

Here are seven ways you can check.

Find out who owns your insurance. Even if you think you do not have AIG policies, your insurance company may be an AIG subsidiary. For example, AIG owns SunAmerica (retirement annuities), 21^st Century (auto insurance), and American General Life and Accident. You can check your insurance company’s Web site, do an online search, or ask your agent.

Even if you own AIG insurance, experts said you do not need to panic.

“The issues that compromised the financial integrity of AIG were at the holding company level, not the underlying insurance subsidiaries, (which) were heavily capitalized,” said Tom Sullivan, Connecticut insurance commissioner and executive committee member of the National Association of Insurance Commissioners. Even if AIG were to file bankruptcy, said Sullivan, the underlying cash reserves would be enough to fulfill all insurance claims.

Economy in Turmoil Jobless rate rises to 26-year high Out-of-work with no place to land, the legions of America's unemployed are growing. The nation's unemployment rate rose to 9.5 percent in June, a 26-year high. Factory orders rise more than expected in May Calif., other states face tough budget choices Pending home sales climb in May Manufacturing report boosts economic hope

Strict state regulations requiring insurance companies to set aside reserve funds for insurance claims provide a strong cushion for policyholders, said Sullivan.

Check the financial health of your insurance company. You can check the balance sheet of insurance companies, to assess its financial strength. The NAIC Web site posts information — including assets and liabilities — of insurance companies.

You can also find out your insurance company’s ratings. Although there is no national rating system, various market research companies rate insurers, based on their financial health. For example, thestreet.com offers ratings, ranging from A to F.

You can also find out an insurance company’s balance sheet by looking at its quarterly reports, which are often posted on a company’s Web site, said Nell Newton, healthcare and insurance industry editor at market research firm Hoover’s. Annual and quarterly reports will show you a company’s investment activities.

Large insurance companies which have diversified into international markets and non-insurance products are most at risk, said Newton. Publicly-held companies under pressure to earn shareholder returns are also financially riskier, said Newton.

In contrast, regional and mutual insurance companies — owned by private investors and policy-holders, respectively — are more financially conservative, said Newton. “They didn’t go off trying to … turn themselves into something other than bread-and-butter insurance companies.”

Check the insurance guarantee limits of your state. In the unlikely event that an insurance company goes bust and cannot fulfill claims, each state has a Guaranty Fund to back policies. “It’s a social safety net, much like FDIC (Federal Deposit Insurance Corporation) insures deposits for banks,” said NAIC’s Sullivan.

Each state’s Guaranty Fund has a different limit, with a nationwide average of about $350,000 per claim. In Connecticut, for example, if a fire burned down your house and car, you could claim up to $500,000 for each — or $1 million total. NAIC.org provides a link to each state’s insurance department, where you can check the guarantee limit.

Policyholders may one day have more guarantees, as lawmakers consider regulation at the federal level, said NAIC’s Sullivan, who believes state regulators are already working effectively. 

Meanwhile, some academics are proposing industry-led regulatory agencies, which would have the financial motivation to back policyholders. “Having a guaranty fund owned by the industry, managed by the industry, financed by the industry, paying the company policyholders — we think is the right solution,” said Guillaume Plantin assistant professor of finance at London Business School, and co-author “When Insurers Go Bust: An Economic Analysis of the Role and Design of Prudential Regulation.”

MORE FROM PERSONAL FINANCE

Personal finance Section Front

Answer Desk: Who'll take California IOUs? It’s recession, when thoughts turn to ... dating Jackson death illustrates will vs. trust issue Answer Desk: Slow stimulus spending Helpful finance tips, or sneaky payday loans ad? New program helps manage student loan debt Recession hurts card industry, customers $60,000 in debt, and nothing to show Answer Desk: How to shrink credit card debt Newsweek: 5 ways to simplify student aid Personal finance Section Front   Add Personal finance headlines to your news reader: