Three Important Facts You Need to Know About an Insurer Before Buying a Policy
U.S. residents pay more than $1 trillion in insurance premiums each year . Most of us have multiple insurance policies, including health, auto, home, and life insurance. And when it comes time to choose a new policy, you’ll likely take a hard look at what premiums you’ll have to pay to get the amount of coverage you want.
But offering a good premium isn’t the only thing you should know about a potential insurer. Fair premiums, low deductibles, and extensive coverage are important, but none of that matters much if you’re choosing an insurer that’s struggling financially, has very low customer satisfaction, or regularly denies even valid claims . If you’re shopping around for an insurance company, there are three things you need to know about any company you’re considering buying a policy from.
Financial stability of the insurer
The most important thing to know about an insurance company is whether it has the cash to cover claims under its policies. Even the best policy in the world won’t do you much good if the company that sold it goes bankrupt when too many people actually try to use the insurance it sold.
States set minimum reserves that insurers are required to have on hand to cover claims, but as the name suggests, these are minimum reserves — sometimes calculated as a percentage of potential claims, sometimes based on other financial factors. Insurance companies cannot legally go below these reserves, but the reserves are only intended to prevent a complete market collapse. In reality, insurers must have much more on hand, especially if there is a possibility of a large number of claims being filed at once (for example, home insurance claims after a disaster like a flood or wildfire). It may seem impressive that a small regional insurer has $100 million on hand to cover claims — but that seems like small change when they have $1 billion in potential claims at any given time.
You can find the financial strength ratings of most insurers on AM Best . You’ll need to create a free account to search the database, but once you do, you’ll immediately see an insurer’s financial strength rating, which can range from an “excellent” A++ to a “poor” D. The site also offers a “Financial Size Category (FSC),” which roughly reflects the amount of cash an insurer has available, ranging from I (less than $1 million) to XV (at least $2 billion). A small regional insurer might only have a few million dollars in the bank, but if its overall rating is A++, it’s still considered financially strong.
Insurer’s Claims Register
A good deal on an insurance policy is only worthwhile if the insurer actually approves and pays out valid claims. I once had a home insurance policy that seemed completely worthless: although it met the requirements of my mortgage lender, it had never paid out on a claim. Of course, they always had a reason why my claims were not technically covered, but that didn’t help me at the time. So it’s vital to research a company’s history of denials or payouts before buying a policy.
Unfortunately, this can be difficult to do because claims approval data is hard to find. Insurers are not required to make it public, so they simply don’t.
There are, however, some resources that can give you insight into a company’s claims approval and denial history. Plans sold through the Affordable Care Act marketplaces are a little more transparent, and you can find past denial rates on the Kaiser Family Foundation website , which provides some clues. You can find studies online that provide some information about which companies deny the most claims, like this one from ValuePenguin, which shows that UnitedHealthcare denies a third of its customers’ claims. It may take some Googling, but denial rate information can potentially be gleaned this way — and if you see denials from a potential insurer mentioned over and over in these studies, you might want to reconsider buying from them.
Assessing the satisfaction of insurer clients
Finally, even a company with a decent claim approval rate and financial stability may not be a good choice if it’s a bad experience. Another thing you should know before buying insurance is the satisfaction rate of current and past customers. This isn’t so much a hard number as it is a feeling, but it’s an important indicator nonetheless.
There are three sources you can use to get an idea of a customer’s satisfaction with an insurer before purchasing a policy:
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State Departments of Insurance. Each state has a department of insurance that regulates insurers that issue insurance policies. These departments often list complaints against insurers on their websites. You can find your state’s insurance department on the National Association of Insurance Commissioners (NAIC) website .
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NAIC. Speaking of NAIC, it also maintains a database of insurers , including complaint reports. Find your prospective insurer and see how many complaints it has, what trends it shows, and how it compares to its competitors.
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Online searches. Finally, people tend to complain publicly about how they’ve been treated poorly by big companies, so searching for mentions of an insurance company on social media and other sites can give you some insight into what it’s like to have an insurance policy with that company. Keep in mind that almost every insurer has its own complaints — people with negative experiences tend to be more vocal than those who are completely or mostly satisfied — so you should pay attention to volume and trends (i.e., a large number of complaints over a long period of time).