A plunging and volatile stock market and weak economic conditions are some of the factors that recently prompted 2 rating agencies to assign a negative outlook to the life insurance industry.
But the impact of a downgrade on companies’ sales and whether they get shelf space for their products after a downgrade requires more examination than just a look at a rating change, say independent broker-dealers.
If there is some issue particular to a company such as the situation with American International Group, New York, then producers may “put it on hold or take it off the shelf,” says Tim Morton, national director of Annuity Marketing for Westland Financial Services, Inc, San Diego. Westland supports the broker-dealer community with compliance-oriented marketing support and training for annuities, life insurance and long term care. He is also chair of the National Association of Independent Broker-Dealers, Princeton Junction, N.J.
In general, to be on the product shelf, he continues, a company needs a rating of “A” or better. Most errors and omissions contracts require that the broker-dealer carry products that are in that rating range, he says. So, if an insurer’s rating was cut to ‘A-’ from ‘A,’ then it would be taken off the shelf, he explains, but if the rating was dropped to ‘A+’ from ‘A++,’ then it would still be within an acceptable rating realm.
When a rating is downgraded, that does not give a producer carte blanche to move business, he says. Rather, other factors such as the suitability of a 1035 exchange and surrender charges must also be considered, he continues.
“Every transaction still has to be looked at for suitability” as well as whether a client is “absolutely adamant about getting out of that company,” Morton explains.
Often, as with the case of AIG, large brokers took the company off the shelf, cancelled pending transactions and got out of contracts that were still in the ‘free look’ period, he says.
Doug Mishkin, managing director with Algren Park Avenue Brokerage, LLC, New York, says it would take more than a downgrade for there to be a recommendation to move a client to another carrier. Mishkin is also current chairman of NAILBA, Fairfax, Va.
While ratings are important, he says rating agencies often have not downgraded a company until after the start of a crisis. “This discounts weighing ratings by themselves.”
Rather, it is important to also consider the underlying investments in a company’s portfolio, including exposure to the sub-prime market and exposure to other financial institutions that may be experiencing trouble as well as what percentage of the total investment portfolio that exposure comprises, Mishkin says.
“The life insurance industry as a whole is like every industry impacted by the economy,” says Mishkin. So, he continues, ratings are just part of a bigger picture. For example, he says he “has done a lot of business with AIG and is not in a panic about AIG. The life insurance subsidiaries are strong.”
Additionally, Mishkin says, they will probably be sold off.
The big question, he says, is to whom. And if they are sold, will whoever buys them uphold particulars of the policy such as interest rates on non-guaranteed universal life contracts as well as the cost of insurance in the contract.
But he doubts that a blanket replacement would be made just on ratings changes alone, he adds. What producers should be doing on a regular basis is reviewing existing policies to see if they still fit in with “the financial plans and goals” of a client, Mishkin says.
With any change in ratings, “we are aware of that immediately. We act on it and look into it,” says Gary Dworkin, owner of Dworkin Associates, Inc., Rochester, N.H., and incoming chairman of NAILBA.
And with the “quick tempo of the marketplace today it is even more important to be on top of a situation,” he asserts.
It is important to be able to offer agents and their customers a number of different carriers in the event there is a problem with one insurer, Dworkin continues.
Even if a carrier is downgraded by a single notch, he continues, a further examination of the rating change is undertaken. And companies usually inform his firm of “any change in fortunes.”
“The first question we try to answer is ‘why?,’” he says. “Then we decide if there is justification for a change.”
If changing carriers is recommended, a number of factors are examined including the ranking of that carrier compared with others that have similar contract terms and rates, as well as companies with comparable strengths, he says.
“Business is never moved just on price, but on the entire impression of the company and on what the client needs,” Dworkin adds.
With the recent case of AIG, “we have not seen many producers removing applications with this company and putting it with another company.” But, “they could move in a number of different directions with future cases,” he adds.