You’d have to say the Financial Strength Rating an insurance company has is an important factor in considering who to place your insurance with and most right thinking people know this to be intuitively correct.

In the case of a life insurance policy (or health, income protection and  trauma insurance for that matter) you need some reassurance that the company will be around in 5, 10 or perhaps even 30 or 40 years time to honour a claim you might make on a policy that you’ve been paying premiums on for a long time. You want to be sure the company is still going to be around to pay your claim in the future, don’t you?

Which is where financial strength ratings come in. They provide a kind of gauge so that the man on the street can get a handle on whether a company is ‘good for it’ or not.

But just as the Heart Foundation Tick is no guarantee that the food you eat won’t kill you so a financial strength rating is not a rock solid guarantee that the company will be around to honour a claim. Still, a rating system has plenty of merit — if you’re able to get a high rating then for the layman it makes a pretty good arbiter of longevity.

When it comes to insurance, financial strength can’t be considered properly without thinking about Reinsurance at the same time.

Reinsurance describes a situation where your insurance company passes on a portion of the responsibility for paying claims to another insurance company, usually in exchange for a portion of the premium you pay. This is a totally normal arrangement in both the life insurance and general insurance industries and makes a lot of sense because the load is shared between two or more companies at claim time. Reinsurance will be very important if lots of claims come in at once and by spreading the load in this way it should actually enhance a company’s financial strength. Having said that, good reinsurance arrangements on their own don’t always translate into a high rating. Hence the title of this post – there’s more to life than a financial strength rating.

Naturally enough cost and what you’re covered for are the primary considerations when choosing which insurer to go with and the final decision is often backed by a recommendation from a trusted person. The reality is that an insurers financial strength is not always considered even though it should be.

 

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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