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."
