The economic challanges that we face in today's world have become second only to the great depression. The collapse of insurance companies, banks and large corporations that have been in the U.S. for years have made people scramble for a place that has security. We are asked often, "where can we place assets that provide safety and security in uncertain times"? One place that should be considered is life insurance companies that have a Legal Reserve classification.
The Legal Reserve System has withstood world wars, recessions, investment scandals, political changes, the recurring economic challanges and one major depression. Most state insurance departments mandate a conservative "statutory" accounting system that will insure company solvency. This "statutory" system has been successful for decades in minimizing insurance company failures and preventing policyholder losses. The state insurance department does review and measure the insurance companies cash flow and liabilities to ensure that they have the cash to meet policyholder obligations. They are audited by state insurance departments at least every 3 years. Life insurance companies also file quarterly and annual statements.
Insurance companies can't capitalize expenses to do business like (World Com) did and it can't transfer liabilities and declare profits today based on future events like (Enron) did.
Legal Reserve companies had their strongest showing of strength during the Great Depression. While thousands of banks closed across the United States, the stronger insurance companies remained inforce and continue to this very day. Many people are not aware that it was not the government that bailed out the banking industry, it was the U.S. insurance companies. In a financial collapse, the insurance companies would be second only to the U.S. government to fold. This is true because the government has taxing power, and can print money.
There are over two thousand different life insurance companies in the United States. Collectively, these companies own, control, or manage more assets than all of the banks in the world combined. They also own, control or manage more assets than all of the oil companies in the world combined.
The reserve pool protects annuity investors as well as those who purchase other life insurance products or policies.
If an insurance company goes out of business, the remaining insurance companies in the state legal reserve pool must assume the liabilities and obligations of the now-defunct insurer. The amount they are required to accept are based on the amount of insurance and annuities they have issued in that state. If one company has issued 10% of all insurance and annuities in that state, then they must accept 10% of any bankrupt insurer's obligations for that state.
There are many rating systems. Which one does the insurance industry use to show the quality of a company? The best known annuity rating service is A.M Best. It is a neutral, unbiased source that rates insurance companies. It has been around since 1899. Anything that is considered BBB, BBB+, A-, A, A+ or A++ is considered strong by industry standards and error and omissions coverage that insurance agents are required to keep in force at all times.
Moody's, Standard and Poor's and Weiss Ratings are other rating systems that will sometimes rate insurance companies but are more well known for stock and bond rating services. The Dept. of Insurance and E & O Carriers look to A.M. Best as the standard for insurance products.
The Legal Reserve System was designed to insure a high level of safety for each of us. It was designed to insure that annuity and life companies have the cash when we need it.