Evaluating a health insurer's financial stability.

Business Owners, Chief Executive Officers, Chief Financial Officers and Risk Managers must make some tough choices everyday in the operation of their companies. A company's financial strength and stability are two of the most critical evaluations senior executives make when deciding with whom to do business. Fortunately, they have several ways to analyze the financial strength and stability of the insurance company they select for their employee benefits. While most insurance companies manage their business very conservatively and have a strong balance sheet, the recent financial difficulties of banks, S&L's, major corporations and some insurance companies have forced business management to scrutinize the financial strength and stability of an insurance carrier more closely.

Choosing an independent broker, agent or employee benefits consultant who is well versed in the health insurance industry is an important factor in helping you evaluate your health insurance company. These professionals can work with you to determine the goals of your health benefits package and guide you in selecting health benefit plans that should meet those goals. Oftentimes, they are the primary source for obtaining financial and operating information for each insurance company that is competing for business. They should make recommendations to you about the reputation, financial strength and stability for each insurance carrier being considered.

Independent financial rating agencies are excellent sources of financial information. The agencies which are most frequently used for evaluating health insurance companies are A.M. Best, Weiss Research, Moodys Financial Services, Standard and Poors and Duff and Phelps. The ratings that are given to insurance companies by these agencies should be used as references and be one part of the overall evaluation process. Each agency uses different criteria to make their evaluation, therefore, it is advisable for you to have your broker explain the different methods used by each agency in determining the ratings. Two separate agency ratings for each insurance company should be sufficient for you make a final selection. Analyzing the carriers' ratings should be the starting point for determining the financial strength and stability of your health insurance carrier.

Health insurance companies with strong balance sheets and good liquidity are expected to serve their clients very well in the business environment of the 1990s. Strong balance sheets will help provide the desired financial stability and good liquidity will help assure prompt and efficient claim payments. The written premium to equity ratio and the liquid assets to expected claim payments ratios are two tests which are frequently used to gauge the financial health of insurance companies. Health insurance companies that consistently manage their businesses with safety margins above the government standards offer you additional protection against unforeseen future events. Your broker should evaluate each competing carrier and summarize these financial ratios for you.

You may want to look beyond your health administration company to evaluate the viability of the insurance company that is actually "at risk." Sometimes, the administrator and the insurance company are two totally separate entities. The administrator may offer excellent claim payment services, but the insurance company should be the entity that is evaluated for financial strength and stability.

Particular attention should be given to offshore based companies and unrated U.S. based insurance companies. Offshore insurance companies are those which are based in countries outside the U.S. Frequently, the countries used for this purpose have favorable tax and banking regulations which make it more difficult to determine their financial viability. Companies that have had their ratings recently lowered for current performance or do not qualify for a rating need to be carefully reviewed.

A few lessons can be learned from last year's hurricane Andrew. This storm severely impacted many property and casualty insurance companies. Within days of realizing the severity of that storm, several small insurance companies in Florida became insolvent. The overall capacity of your health insurance company to withstand a significant catastrophic event is the bottom line measure of financial strength and stability. California could experience a major earthquake or other events which could result in large scale medical expenses which must be paid by health insurance companies.

You have a wide variety of choices available in selecting your health insurance company. This industry has a long history of solid performance. The key point to remember is to screen the companies carefully to avoid those few exceptions which do not offer the protection your premiums are intended to provide. The impact on employee morale and potential exposure to fiduciary liabilities for selecting a weak or unstable insurance carrier means that top management must continue devoting substantial resources to making a good carrier selection.

Charles L. Wood is President - Group Division, United Insurance Company of America.

KEY ISSUES

* Select an insurance professional.

* Review the ratings.

* Avoid unrated and low rated companies.

* Select companies with solid balance sheets and good liquidity.

* Analyze administrators and insurance companies independently.