- What is the quality of your assets?
Equity and fixed income markets have rebounded, but many asset valuations remain suspect, not only in the mortgage-backed securities and commercial real estate markets but also in conservative investments such as money market funds. Find out exactly what is in the company's investment portfolio. - How current and secure are your ratings?
Check when ratings were issued and whether the insurer is being considered for a downgrade. Also ask your insurer's senior executives how confident they are that their company's ratings dovetail with their own view of its financial strength. - What is your ability to absorb a major loss?
While statutory capital levels for U.S. property/casualty insurers have fallen, companies are still insuring major risks. Their capital levels could be squeezed even more in the event of a major loss, jeopardizing their capacity. Insurers track how much of their capital is at risk and should be willing to share that information. As part of your discussion, ask your insurer how much reinsurance it carries and for what risks. - What planning have you done for a major shock event?
Ask your insurer whether it has calculated the impact of a major shock event on its financial position and what it has learned. Look for evidence that the company embraces ERM as a core discipline, and perhaps most importantly, ask what it is doing to help clients prevent or mitigate property loss and business disruptions. - How liquid is your company's investment portfolio?
Having sufficient liquidity to meet claims is critical when asset values are low. Selling depressed long-term assets to meet current claims could reduce an insurer's capital position, possibly impairing its ability to meet your risk management needs. If your insurer's investment portfolio is not more liquid today than it was two years ago, find out why. - Has your asset allocation mix changed recently, or do you have plans to change it?
A stable asset allocation mix reflects a stable insurer. Changing the mix now may make sense if it corrects an investment strategy that was not working, but it could require selling assets in a weak valuation environment, diminishing the company's capital position. - Does your insurer have a consistent and successful business model?
Good insurance companies innovate, but cautiously-especially in a tough economy. An insurer writing new lines of business today-business for which it may not know the ultimate cost-deserves scrutiny. Look for insurers with a long, consistent book of business, and operating and underwriting results that beat industry averages. - How stable is your executive suite?
Senior leaders should not be on a carousel, especially when business conditions are treacherous. Many talented executives have left their jobs, especially at insurers that received financial support from the government and now face compensation constraints. Ask your insurer how long the senior management team has been in place and how long they intend to stay. - How leveraged are you?
Any insurer carrying high levels of debt could face serious hurdles in rolling that debt over, at least at a palatable cost, over the next few years. Find out what your insurer's debt profile looks like. - What is your claims payment history?
A key question for any insurer is whether they will make timely payment on validated claims. If you do not have a claims history with your insurer, ask other clients about their experiences.
Corporate risk managers have never been more concerned about the solvency of their insurance companies, and with good reason. Earnings for U.S. property/casualty insurers are down and their pricing power, despite hints of a turnaround, remains weak. Meanwhile, major ratings agencies have given the U.S. property/casualty sector a negative outlook. In this environment, it is appropriate to demand additional information from insurers about their financial health. Here are 10 questions to kick off your discussions.