Through catastrophic world wars, corporate scandals, financial depressions, earthquakes, hurricanes, and other environmental problems over which we have no control, the Life Insurance Industry has always protected consumers — a degree of protection that is unsurpassed by any type of financial institution in history. No beneficiary in America has ever failed to receive the full death benefit from a life insurance policy, nor has any Fixed Index Annuity contract holder ever lost a penny of principal in their FIA contract due to insurance company insolvency.
The Five Pillars of Safety:
- Legal reserve system
- State guaranty funds
- Holding companies
- Strict regulatory investment practices
Legal reserve system
The insurance industry has gone to great lengths to assure the safety of annuity investments and to establish consumer confidence. An insurance company must be able to handle the unexpected, hence the institution of the legal reserve system. The reserve system specifies a dollar amount that the insurance companies must keep in reserve, and this solvency ratio can be likened to a client saving cash for a rainy day. How the reserve amount is calculated varies from state to state, and, as with all insurance matters, it involves adequately predicting and balancing risk. Insurance companies invest these reserve funds in investment grade bonds, US treasury bills, and government backed securities in order to provide these underlying guarantees. Insurance companies avoid or manage risk – they don’t take risk. (Please see holding companies for a solvency ratio example).
State guaranty funds
The purpose of state guaranty associations is to provide a mechanism for the prompt payment of covered claims of an insolvent insurer. (To date, no one has ever lost a penny of their principal in a fixed index annuity, nor has anyone in America ever failed to receive the full death benefit on a life insurance claim). This safeguard exists so that a catastrophic financial loss to certain contract and policyholders may be avoided. These guaranty associations make assessments to obtain the funds to pay claims if an insurer becomes insolvent. Each state has a guaranty fund or association www.inlifega.org that assumes the claim payment responsibilities for insolvent insurance companies.
The definition of reinsurance is insurance purchased by an insurer. In many states the Department of Insurance requires insurance companies to reinsure one another before they can offer their products in that state.
From a global perspective, Swiss Re is one of the world’s leading reinsurers and the world’s largest life and health reinsurer. A global expert in managing capital and risk, Swiss Re’s objective is to anticipate, identify, and understand industry developments that shape the future risk landscape.
Basically, reinsurance companies can absorb some of the capital strain associated with writing fixed annuity business, including both statutory reserve strain and target capital strain.
As you may already know, many insurance companies are not domiciled in the United States. Rather, several insurance carriers with North American headquarters located in the United States are part of a larger parent company. There are numerous examples, but let’s look at two – Allianz Life Insurance Company and Aviva Life and Annuity.
Allianz’s parent company is Allianz SE, which is headquartered in Germany. Allianz SE has more than 75 million customers in about 70 countries, employing 150,000 people worldwide. Allianz SE has generated more than $64 billion dollars in equity-index annuity sales, and is the 14th largest corporation in the world and the 3rdlargest money manager. Allianz’s solvency ratio is 161% (meaning that for every dollar on deposit, they have $1.61 in reserve – vastly different from the banking industry, where reserves are always less than deposits – hence the need for FDIC).
Aviva plc is the 5th largest insurance group in the world with $573.8 billion in funds under management, 50 million customers and 54,000 employees worldwide. Aviva has been delivering on it’s promises for more than 300 years, since 1696. Over the years Aviva has insured Sir Winston Churchhill, Queen Victoria, and turned down Napoleon Bonaparte. The rest is history.
These examples simply demonstrate that insurance carriers have parent companies with deep pockets to ensure safety to their consumers’ diverse portfolios.
Strict regulatory investment practices
The basis of the regulatory investment practice is to show how financially stable one company can be with its investments. They base that stability upon their solvency, which is the company’s assets over liability. This allows the company to meet all obligations as a client’s financial payout becomes due. The results are based upon a rating that shows just how stable a company really is, usually based upon AM Best or S&P 500 standards.
An annuity should be defined as a safe and secure compounded growth instrument, guaranteed on a tax-advantaged basis with the ability to capture stock market-like returns without the risk to principal or prior gains.
If you could have purchased an FIA every month, beginning in August 1929, your average annual index annuity return for the Great Depression would have been 6.4%. All of this during a decade that ended 65% lower than when it began. *Jack Marrion, President of Advantage Compendium, Ltd as quoted in Senior Market Advisor – July 2009 (www.safemoneyplaces.com)
For additional information and resources regarding money you can’t afford to lose, go to… www.safemoneyplaces.com
Read the following information from the Indiana Department of Insurance. Indiana Consumer Awareness