Download The Ethics of Rebating and Replacement

Ethics In Life
1 hour Ethics Credit KS & MO
C.E. Solutions
Tracy Young, CLU, HIA, ALHC
913-980-CE4U(2348)
www.continuingedsolutions.com
Ethics In Life
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Review and study this course at your leisure.
Once the course is completed, enter the exam through
the ClassMarker link at the end of the exam.
– You must receive a score of 70% or better to pass.
– You may retake the test at no additional cost as
needed.
The Insurance Department requires that all exams be
taken in the presence of an approved disinterested 3rd
party monitor.
Course Certificate will be faxed and sent electronically
to the insurance department when notification of a
passing score and an affidavit signed by the person
monitoring the test is received.
2
C.E. Solutions
The material presented in this course is for
educational and informational purposes only. It
should not be used to provide guidance to your
customers or clients in lieu of competent,
certified, legal advice. The parties involved in
the development of this course shall not be
liable for any inappropriate use of this
information beyond the purpose stated above.
As a student, you should understand that it is
your responsibility to adhere to the laws and
regulations pertaining to any aspect of this
course and the materials presented within.
3
Ethics In Life
 Course
Description: This course will
cover ethical issues involving Life
insurance … including ethical illustrations,
the ethics of rebating and replacing, and
consumer expectations. We will also
compare the different independent rating
companies and determine how they can
help you decide which company to work
for or place your business with.
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A Quote From Mark Twain ..
“A lie can travel halfway
around the world while the
truth is putting on its
shoes.”
5
Selling Life Insurance
In the “good old days”, selling life insurance
was basically a simple process.
 You needed a rate book (which contained
all the rates for every plan the company
offered).
 Most of the rate books were small enough
to fit in a shirt pocket!
 You had fewer products to market.
 You were more likely to go to
the customer’s home, or their
business to conduct business.

6
What Revolutionized the
Selling of Life Insurance?
 The

electronic revolution.
Do you remember the introduction of the
“Super computers”?
 The
“Home Office” had them.
 If you had a special client … or a really
big life policy … you could send your
request for a detailed illustration.
 It could be a two-week process,
considering mail and processing time, to
have an illustration to present to your
client.
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What Revolutionized the
Selling of Life Insurance?
 Then
came …
desktop computers:
– Your own computer!
– The ability to print your
own illustrations!
 Now
we have laptops that
carry more power than that
home office computer had at
its disposal only ten years ago.
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Technology and Life Insurance

It’s an interesting combination – a coldly
logical tool like a computer, injected into
a sales interview situation requiring
sensitivity, warmth, & often emotion
rather than logic. How do you make it
work?
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What products were developed and are
enhanced because of the computer?
 Flexible
products like Universal Life.
 Variable Life Insurance.
 The
flexibility of modern life
insurance products is a tremendous
benefit for the consumer. With
technology, we are able to better
customize illustrations to fit our
customers needs.
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Consumer Understanding
 Are
there disadvantages to the
flexible products & complex
illustrations?
– Consumers may find it difficult to
understand.
– Sometimes too much information may
lead to indecision … and a missed sale.
– There is an increased potential for
abuse.
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Consumer Understanding
Think of how many hours
you have spent studying,
training, testing (not to mention
continuing education) to learn life
insurance?!
 What do you do to help a prospective
insured understand pages and pages of
computerized illustrations, plus the details
and differences of life policies in a 1-2 hour
interview?

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Consumer Understanding

Offer company-approved brochures that
summarize products discussed.
– This gives the customer something they can
take home with them to review.
– It provides a guideline for the agent’s
discussion, with less likelihood of leaving out
something important.

Understand it may take several meetings
with a customer before the life needs are
determined and a sale is made.
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What Do Today’s Customers Want?

They may need more information.
– Some will come to you with quotes and
information they have researched on the
internet. They may have questions as to how
they compare.
They will expect truthfulness.
 They want to know the product they buy is
what you say it is.
 And some are willing to pay lawyers to get
it.

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What Can Go Wrong?
Dishonest agents have created
illustrations using unrealistic assumptions
about interest rates, mortality costs &
expenses and lead insurance prospects to
purchase policies .
 The prospect is overwhelmed by all the
numbers on the page, and the unethical
agent draws attention to the one or two
“really important numbers” … finding the
column with the highest interest
assumption & the lowest mortality &
expense assumptions.

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What Can Go Wrong?
When the policy does not
perform as expected, the
prospect is disillusioned and
disgusted with life insurance.
 When the ethical agent
approaches this customer, they
have additional work to do.

– The agent has to regain this
person’s trust in the life insurance
product.
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What is the challenge to you …
the ethical agent?
 Finding
a way to explain
a difficult-to-understand
product with a
complicated illustration
… in a way that
genuinely helps
prospects make good
decisions.
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How do you do that?
 The
agent helps the prospect
understand the “big picture” of how
life insurance moves the prospect
toward his financial goals.
 Use the illustration to help define
important details about how the
product works.
 Reveal any risks that are involved.
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Can a life insurance company share
responsibility for improper illustrations?

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
Life insurance illustration software is created by or
for the insurer. In order to give the agent the
power to create inaccurate illustrations, the
software has to be designed with that capability in
place.
An agent would be hard-pressed to manipulate
illustration software beyond what’s allowed by the
software design.
You may have seen some changes over the years,
in the flexibility of your illustrations. Most
programs allow for very little, if any,
manipulations any more.
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The NAIC Illustration
 Part
of the fallout of the
market conduct scandals
in recent years is the
increased effort by the
National Association of
Insurance Commissioners
(NAIC) to curb abuse of
policy illustrations.
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What did the NAIC do in 1995 that
changed life illustrations?
 After
a highly publicized case of
illustration abuse in Florida, the NAIC
stepped in with some new rules.
 They formed a committee that developed
“standards” for policy illustrations.
 They mandated how the illustration must
be calculated & what assumptions are
permitted.
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What Are Some Of The NAIC
Illustration Requirements?

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
The illustration
must be signed by
the prospect & the
agent.
The illustration
must match exactly
the insurance
applied for.
Any revised illustration
must also be signed &
dated.



Companies that use
illustrations must identify
one or more actuaries
who will certify the
illustration’s
reasonableness.
Mortality projections
must be based on
company experience (or
industry experience).
Mortality cannot be
projected to improve
over the period
illustrated.
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What Are The benefits to the NAIC
Life Insurance Illustrations
Model Regulation?
 The
illustrations are
more credible.
 There is more
consistency between
illustrations.
– You can now compare
apples to apples.
 There
is more
disclosure to the
consumer.
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Is There A Downside To The
NAIC Life Insurance Illustrations
Model Regulation?
There are more pages,
more text & more
numbers.
 The illustrations are more
complex.
 The illustration is more
difficult for an average
person to understand.

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Isn’t This Carrying It
To The Extreme?


Why are agents and prospects put through
this rigorous challenge just to look at a life
illustration?
Because unscrupulous
agents & companies
insisted on playing
games with illustrations.
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Organizations That Help
What channels are available to help
combat market conduct problems and
rebuild the public’s trust?
National Association of Insurance &
Financial Advisors
 Society of Financial Service Professionals
 American Council of Life Insurers
 Insurance Marketplace Standards
Association (IMSA)

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National Association of
Insurance & Financial Advisors
Their website, www.naifa.org, gives
information regarding government
relations and consumer information.
 They provide consumers information
regarding:

– Life, health, disability, & long term care
insurance.
– Stocks, bonds, mutual funds, & 401K plans.
– Managing your retirement & estate … asset
allocation, annuities, living will, durable power
of attorney, gifting, bypass and irrevocable life
insurance trusts.
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Society of Financial
Service Professionals
 By
going to www.financialpro.org,
consumers can find the following
information:
– General financial planning topics.
– Tax law information for estate planning,
pension, and profit sharing.
– Tips on choosing a financial advisor.
– Tips on purchasing life insurance,
disability insurance & utilizing charitable
gifts.
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Society of Financial
Service Professionals

The Code of Professional Responsibility of the
Society of Financial Service Professionals is
divided into five components, as follows:
– Preamble – a brief introduction to the Code of
Professional Responsibility, including its history and
purpose.
– Canons – inspirational model standards of exemplary
professional conduct.
– Rules – specific standards of a mandatory and
enforceable nature.
– Applications – practical examples of how the canons and
rules apply in given situations.
– Disciplinary Procedures – the mechanisms for
enforcement of the Code of Professional Responsibility.
– They even have a confidential ethics hotline that
consumers and professionals may call to report unethical
behavior.
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American Council
of Life Insurers
 At
www.acli.com, consumers will find
tips for returning income from tax
returns to their retirement savings,
and how to purchase life, disability,
long term care, and annuities.
– Also on the website, you can find
information regarding hot political
issues facing congress and locally in our
states.
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The Ethics of Rebating and
Replacement
“A billion dollars here and a billion
dollars there – pretty soon you’re
talking about real money!”
– Sen. Everett Dirksen
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Rebating and Replacement
In insurance, “rebating” is not
allowed, and “replacement” is not
always ethical.
 What
is rebating?
– Returning part of a premium to the
insurance applicant as a rebate.
 What
is replacement?
– Replacing existing life insurance.
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Debating Rebating
What’s wrong with rebating?
Automobile Companies do it all the time!

From Yahoo! Finance, “The Effects Of Lapsing Your Life
Insurance Policy”” insurance.yahoo.com/lh/policylapse.in.html
“Watch Out for Rebating … If an agent approaches
you about giving you a chunk of his commission … if
you agree to lapse your policy and apply for a new
one, watch out. That's a practice called "rebating"
and it's illegal in all states except for Florida and
California, according to Jack Dolan, a spokesperson
for the American Council of Life Insurers. Rebating
applies to any sales practice in which an agent
entices a customer to buy an insurance product by
giving him or her part of the commission.”
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Debating Rebating

From Yahoo! Finance, “The Effects Of
Lapsing Your Life Insurance Policy””
insurance.yahoo.com/lh/policylapse.in.html
“Rick Sabo of Money Concepts International in
Gibsonia, Penn., a former agent with Metropolitan
Life Insurance Co. who is now a consultant to
policyholders and attorneys in insurance lawsuits,
says that rebating is extremely rare. And even if
agents convince a person to lapse an old policy,
the customer may not realize what they are
doing…”
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Debating Rebating

From Yahoo! Finance, an article shares this
info … “Watch Out for Rebating”
insurance.yahoo.com/lh/policylapse.in.html
“Randy McConnell, a spokesperson for the Missouri
Department of Insurance also says that rebating
is much rarer than other forms of insurance
fraud, such as churning. He says that if an agent
wants to illegally mishandle a policy, they have
greater incentive to do it on their own rather than
team up with the insured because they will not
have to split the commission. Rebating ‘is not a
high volume kind of thing’…”
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Debating Rebating

From Yahoo! Finance, an article shares this
info … “Watch Out for Rebating”
insurance.yahoo.com/lh/policylapse.in.html
“Lisa Santucci, a senior attorney with the Florida
Department of Insurance, receives a number of
inquiries from agents and insurance companies
asking if they can give a cash bonus to a
customer who buys a policy or annuity from
them. But she has not seen any cases where an
agent and a customer "teamed up" to churn a
policy and split the commission on the new
policy.”
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Debating Rebating

From The Office of General Counsel of the New York State
Insurance Department …
“According to the express language of the statute,
insurance agents and brokers are prohibited from
offering rebates or other inducements in connection
with the sale of life insurance, health insurance or
annuities, when such rebates or inducements are not
specified in the policy or contract of insurance. The
purpose of the statute is to prohibit agents and
brokers from offering a contract other than what is
expressly stated in the policy. Therefore, if it is not in
the contract, it cannot be used as an inducement to
purchase the policy.”
www.ins.state.ny.us/rg003101.htm
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Debating Rebating

From the Florida Association of Insurance Agents
www.faia.com/education/edlibrary/fees.cfm
626.572 Rebating; when allowed.- (1) No agent shall rebate any portion of his or her commission
except as follows:
 (a) The rebate shall be available to all insureds in the same
actuarial class.
 (b) The rebate shall be in accordance with a rebating schedule
filed by the agent with the insurer issuing the policy to which
the rebate applies.
 (c) The rebating schedule shall be uniformly applied in that all
insureds that purchase the same policy through the agent for
the same amount of insurance receive the same percentage
rebate.
 (d) Rebates shall not be given to an insured with respect to a
policy purchased from an insurer that prohibits its agents from
rebating commissions.
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Debating Rebating

From the Florida Association of Insurance Agents
www.faia.com/education/edlibrary/fees.cfm
626.572 Rebating; when allowed.- (e) The rebate schedule is prominently displayed in public view
in the agent's place of doing business and a copy is available to
insureds on request at no charge.
 (f) The age, sex, place of residence, race, nationality, ethnic
origin, marital status, or occupation of the insured or location of
the risk is not utilized in determining the percentage of the
rebate or whether a rebate is available.
 (2) The agent shall maintain a copy of all rebate schedules for
the most recent 5 years and their effective dates.
 (3) No rebate shall be withheld or limited in amount based on
factors, which are unfairly discriminatory.
 (4) No rebate shall be given which is not reflected on the rebate
schedule.
 (5) No rebate shall be refused or granted based upon the
purchase or failure of the insured or applicant to purchase
collateral business.
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Debating Rebating
 Check

out www.rebates4u.com
HERBERT COHEN FINANCIAL SERVICES
advertises “LIFE INSURANCE
The Best for LESS
Highest Quality A++, A+ or A
Low Cost Premiums
Selected From Computer List
65% Insurance Commission Rebates by Agent
- California only.
* or FREE Revocable Living Trust.”
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What problems does rebating
premiums cause?






Applicant could simply contract a new agent
every year & drive a bargain for a new policy &
new rebate.
Price was often the only criteria for purchasing a
policy.
Adversely affected the pricing of insurance
products because of the resulting lapse ratios.
Some companies designed policies with large first
year premiums to allow for the rebate (Pity the
poor consumer who didn’t know he could bargain
for the premium amount and paid full price).
Uninformed insurance consumers were
subsidizing the rebating craze.
Agents commission was not guaranteed.
41
The Ethics of Rebating
Is rebating part of the cost
of a product to a consumer
unethical? Car companies
& many other retailers do it
all the time – and customers
love it!
 But in insurance it is illegal and should
be avoided at all times & places
regardless. Doing so has proven to
deliver poor results for agents,
companies & consumers.

42
What About Replacement?
 Before
1906, there was no statutory
requirement of guaranteed cash
value, no requirement to pay
dividends annually & no
incontestability clause.
 Replacement of a policy then did not
hold as many concerns as it is does
today.
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What are the potential losses to the
insured with a replacement?

If death occurs during the contestable
period, the claim may not be paid.
– In Kansas, “prior time served” is carried over to
the new policy for the contestable period.
If suicide occurs within the suicide
exclusion period.
 Expenses associated with issuing new life
policy (front loaded).
 Loses the benefit of cash value build-up &
dividends.

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How does replacement work
against the agent & company?
 Widespread
replacement costs
everyone.
 A company will not realize the
anticipated persistency it calculated
into premium rates at time of issue.
 An agent loses a life client & possibly
other lines of business with that
client.
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Replacement

What is another term for
replacement?
– “Twisting”

Is a replacement of an existing
policy always bad for the
policyholder?
– No. The policyholder may be able to
purchase a better policy at the same
or lower cost depending on what type
of policy they own.
46
What do replacement
regulations focus on?
 Providing
all pertinent information
about both the new & old policies so
the consumer can make an informed
decision.
47
Kansas
Replacement
Notice
 When
you do
replace a
policy,
the customer
must be given
a notice such
as this.
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The Ethics of Replacement
The
fact that
replacement is not
illegal places it
squarely in
the realm of
ethical behavior.
49
What Two Tests Might You Ask Yourself,
Before Replacing a Current Life Policy?
The “Golden Rule”. Would you make this
replacement for yourself if you were both
policyholder and agent?
 If you replace a contract tonight, and all
the facts of the transaction are published
in tomorrow’s newspaper for all your
friends, relatives, clients & competitors to
see, will they condone your actions?
 If you can answer yes to both questions,
make the replacement. And don’t forget
to complete the paperwork (compliance) to
fulfill market conduct requirements.

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 Rebating
is illegal in Kansas and
Missouri, though not technically
unethical.
 Replacement is potentially unethical,
but not illegal.
 Follow this rule: Never engage in
rebating & replace existing coverage
only when it’s in the best interest of
the insured. By keeping this rule,
you will never be faced with the third
“R” of market conduct … REGRET!
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Choosing a Company
 How
do you choose a company to
represent?
– If you are a captive agent for only one
company, you may have chose that
company for it’s reputation in the
business.
– For some, it may just have been the
employment opportunity that came at
the “right time”.
52
Choosing a Company
 What
does the Independent
insurance agent look at when they
decide what Life Insurance
Companies to represent?
– Company reputation?
– Quality of service provided to
customers?
– Details of the agent’s contract?
– All of the above?
53
Choosing a Company
 Choosing
a life
insurance company
to represent isn’t
always a wellinformed decision.
– Did you know the details
of your company policies
or conduct when you
entered the life
insurance business?
54
Company Philosophy
Towards Policyholders

Most companies treat both their
policyholders & their agents very well;
working hard to fulfill the promise made
to the individual at the time the policy
was issued.
55
When Does The Life Company
Fulfill Their Promise?
Upon the death of their insured.
 Death claims are generally easy & quick to
administer.
 Seldom is there cause for dispute.
 Paperwork is usually a claim form, death
certificate & or a newspaper obituary.
 The claim check is sometimes even more
than expected due to interest or
dividends.

56
Fulfilling The Promise
 From
an ethics & market conduct
perspective, efficient claim
settlement is very important.
 There should be no hassles at a time
when a loved one has just been lost.
 The payment should be made
without delay.
57
Other Interested Parties


Stockholders – interests are generally centered
around the return on their investment & they
require (& are entitled to) fair return on the
capital they have invested. Stockholders do have
the power to control &/or change company
management, so the company usually takes care
to treat this group fairly.
Mutual Company policyholders – Policyholders
play virtually no role in company operations &
have very little, if any, control over the board of
directors. This group has little or no knowledge
of the business. Unethical companies may take
advantage of this.
58
How Do You Know How a Mutual Company
Treats Its Policyholder/Owners?
Listen carefully & be observant.
 Senior management may refer to the
policyholders as “owners”.
 There is references in policyholder
communications to “your company” or
“your board of directors”.
 Comments by managers such as “This is
not a good use of our policyholder’s
money”.
 You will want to know the company you
represent is responsible toward your
policyholders.

59
The Golden Rule


The Golden Rule applies
again.
Place your client’s
insurance business with
companies that you would
choose for your own
insurance needs.
60
Company Philosophy
Toward Its Agents
Choose a company whose employees
(underwriters, claims people,
management, etc.) treat agents as they
would want to be treated themselves.
 The home office employees should treat
agents as full partners in fulfilling the
company’s mission.
 When should you be concerned?

– When there is generally a poor attitude of
home office employees toward agents.
– When there is a lack of respect for the agent’s
paycheck (timing of policy issuance or
commission delays).
61
Industry Ratings
What
are the company’s
ratings? Placing your client’s
life insurance protection in
the hands of a company you
know to be financially weak is
not only unethical, you could
be held liable.
62
What Are Sources For Independent Ratings
of a Company’s Financial Strength?

A.M. Best Company.
– www.ambest.com

Standard & Poor’s Insurance Rating
Services.
– www.standardandpoors.com

Moody’s Investment Service.
– www.moodys.com

Fitch Ratings
– www.fitchratings.com

Weiss Ratings.
– www.weissratings.com
63
A.M. Best
A.M. Best assigns two types of ratings. Both
are independent opinions, based on a
comprehensive quantitative and qualitative
evaluation, of a company's balance sheet
strength, operating performance and
business profile. They are not a warranty
of a company's financial strength and ability
to meet either its obligations
to policyholders or its financial
obligations.
64
A.M. Best
Financial Strength Ratings
A Best's Financial Strength Rating (FSR) is an opinion of an insurer's ability to meet its obligations
to policyholders. Rating Modifiers and Affiliation Codes may also be associated with these ratings.
The following list outlines our rating scale and associated descriptions.
SECURE
VULNERABLE
A++, A+ (Superior)
B, B- (Fair)
A, A- (Excellent)
C++, C+ (Marginal)
B++, B+(Very Good)
C, C- (Weak)
D (Poor)
E (Under Regulatory
Supervision)
F (In Liquidation)
S (Rating Suspended)
65
A.M. Best
Debt Ratings
A.M. Best's Long-Term Debt Rating (issue credit rating) is an opinion as to the
issuer's ability to meet its financial obligations to security holders when due. These
ratings are assigned to debt and preferred stock issues.
Ratings from "aa" to "ccc" may be enhanced with a "+" (plus) or "-" (minus) to
indicate whether credit quality is near the top or bottom of a category. A
company's Long-Term Credit Rating also may be assigned an Under Review
modifier ("u") that generally is event-driven (positive, negative or developing) and
indicates that the company's Best's Rating opinion is under review and may be
subject to near-term change.
Long-Term Credit Ratings
Investment Grade
Non-Investment Grade
aaa (Exceptional)
bb (Speculative)
aa (Very Strong)
b (Very Speculative)
a (Strong)
ccc, cc, c (Extremely Speculative)
bbb (Adequate)
d (In Default)
66
Standard and Poor’s



INSURER FINANCIAL ENHANCEMENT RATING DEFINITIONS
A Standard & Poor's Insurer Financial Enhancement Rating is a
current opinion of the creditworthiness of an insurer with respect
to insurance policies or other financial obligations that are
predominantly used as credit enhancement and/or financial
guarantees. When assigning an Insurer Financial Enhancement
Rating, Standard & Poor's analysis focuses on capital, liquidity,
and company commitment necessary to support a credit
enhancement or financial guaranty business.
Insurer Financial Enhancement Ratings are based, in varying
degrees, on all of the following considerations:
– Likelihood of payment-capacity and willingness of the insurer to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;
– Nature of and provisions of the obligations; and
– Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
67
Standard and Poor’s
Insurer Financial Enhancement Ratings




AAA EXTREMELY STRONG capacity
to meet its financial commitments.
‘AAA’ is the highest Insurer
Financial Enhancement Rating
assigned by Standard & Poor’s.
AA VERY STRONG capacity to meet
its financial commitments. It differs
from the highest-rated insurers
only in small degree.
A STRONG capacity to meet its
financial commitments but is
somewhat more susceptible to the
adverse effects of changes in
circumstances and economic
conditions than higher-rated
insurers.
BBB ADEQUATE capacity to meet
its financial commitments.
However, adverse economic
conditions or changing
circumstances are more likely to
lead to a weakened capacity of the
insurer to meet its financial
commitments.





BB LESS VULNERABLE in the near
term than other lower-rated insurers.
However, it faces major ongoing
uncertainties and exposure to adverse
business, financial, or economic
conditions that could lead to the
insurer's inadequate capacity to meet
its financial commitments.
B MORE VULNERABLE than the
insurers rated 'BB', but the insurer
currently has the capacity to meet its
financial commitments. Adverse
business, financial, or economic
conditions will likely impair the
insurer's capacity or willingness to
meet its financial commitments.
CCC CURRENTLY VULNERABLE, and is
dependent upon favorable business,
financial, and economic conditions to
meet its financial commitments.
CC CURRENTLY HIGHLY VULNERABLE.
Plus (+) or minus (-): Ratings may
be modified by the addition of a plus
or minus sign to show relative
standing within the major rating
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categories.
Moody’s
Insurance Financial Strength Ratings

Moody’s Insurance Financial Strength Ratings are
opinions of the ability of insurance companies to
repay punctually senior policyholder claims and
obligations.
Long-Term Insurance Financial
Strength Ratings

Moody’s rating symbols for Insurance Financial
Strength Ratings are identical to those used to
indicate the credit quality of long-term obligations.
These rating gradations provide investors with a
system for measuring an insurance company’s
ability to meet its senior policyholder claims and
obligations.
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Moody’s





Aaa … offer exceptional financial
security. While the credit profile of these
companies is likely to change, such
changes as can be visualized are most
unlikely to impair their fundamentally
strong position.
Aa … offer excellent financial security.
They are rated lower because long-term
risks appear somewhat larger.
A Insurance companies rated A offer
good financial security. However,
elements may be present which suggest
a susceptibility to impairment sometime
in the future.
Baa … offer adequate financial
security. However, certain protective
elements may be lacking or may be
characteristically unreliable over any
great length of time.
Ba … offer questionable financial
security. Often the ability of these
companies to meet policyholder
obligations may be very moderate and
thereby not well safeguarded in the
future.


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
B … offer poor financial security.
Assurance of punctual payment of
policyholder obligations over any long
period of time is small.
Caa … offer very poor financial
security. They may be in default on
their policyholder obligations or there
may be present elements of danger
with respect to punctual payment of
policyholder obligations and claims.
Ca … offer extremely poor financial
security. Such companies are often in
default on their policyholder
obligations or have other marked
shortcomings.
C … are the lowest-rated class of
insurance company and can be
regarded as having extremely poor
prospects of ever offering financial
security.
Note: Moody’s appends numerical modifiers 1,
2, and 3 to each generic rating classification
from Aa through Caa. Numeric modifiers are
used to refer to the ranking within a group —
with 1 being the highest and 3 being the
lowest. However, the financial strength of
companies within a generic rating symbol (Aa,
for example) is broadly the same.
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Fitch
The Fitch Ratings Insurance Group provides
ratings and research on insurance and insurancerelated companies worldwide. Because of the
increasing globalization of insurance markets, the
group coordinates all research and analysis
through a Global Insurance Ratings & Policy
Committee, whose goal is to achieve consistency
of rating methodology across countries. At the
same time, Fitch strives to ensure that its
insurance ratings fully incorporate the unique
aspects of local markets by assigning lead
analysts with local market knowledge and
presence. The Insurance Group balances local
expertise with global oversight to distinguish
their ratings in the marketplace.
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Fitch


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
AAA Exceptionally Strong ... viewed as
possessing exceptionally strong capacity to
meet policyholder and contract obligations.
For such companies, risk factors are minimal
and the impact of any adverse business and
economic factors is expected to be
extremely small.
AA Very Strong ... viewed as possessing
very strong capacity to meet policyholder
and contract obligations. Risk factors are
modest, and the impact of any adverse
business and economic factors is expected to
be very small.
A Strong … viewed as possessing strong
capacity to meet policyholder and contract
obligations. Risk factors are moderate, and
the impact of any adverse business and
economic factors is expected to be small.
BBB Good ... viewed as possessing good
capacity to meet policyholder and contract
obligations. Risk factors are somewhat high,
and the impact of any adverse business and
economic factors is expected to be material,
yet manageable.
BB Moderately Weak ... viewed as
moderately weak with an uncertain capacity
to meet policyholder and contract
obligations. Though positive factors are
present, overall risk factors are high, and
the impact of any adverse business and
economic factors is expected to be



B Weak ... viewed as weak with a poor
capacity to meet policyholder and contract
obligations. Risk factors are very high, and
the impact of any adverse business and
economic factors is expected to be very
significant.
CCC.CC.C Very Weak ... viewed as very
weak with a very poor capacity to meet
policyholder and contract obligations. Risk
factors are extremely high, and the impact of
any adverse business and economic factors is
expected to be insurmountable. A ‘CC’ rating
indicates that some form of insolvency or
liquidity impairment appears probable. A ‘C’
rating signals that insolvency or a liquidity
impairment appears imminent.
DDD,DD,D Distressed ... These ratings are
assigned to companies that have either failed
to make payments on their obligations in a
timely manner, are deemed to be insolvent,
or have been subjected to some form of
regulatory intervention. Within the ‘DDD’–‘D’
range, those companies rated ‘DDD’ have the
highest prospects for resumption of business
operations or, if liquidated or wound down, of
having a vast majority of their obligations to
policyholders and contract holders ultimately
paid off, though on a delayed basis (with
recoveries expected in the range of 90–
100%).
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Weiss Ratings

The Weiss Safety Ratings represent a completely
independent, unbiased opinion of an insurance
company's financial safety -- now, and in the
future. The ratings are derived, for the most part,
from annual and quarterly financial statements
obtained from state insurance commissioners.
This data is supplemented by information that we
request from the insurance companies
themselves. Although we seek to maintain an
open line of communication with the companies
being rated, we do not grant them the right to
influence the ratings or stop their publication.
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Weiss Ratings




A Excellent … excellent financial security.
It has maintained a conservative stance in
its investment strategies, business
operations and underwriting commitments.
While the financial position of any company
is subject to change, we believe that this
company has the resources necessary to
deal with severe economic conditions.
B Good … good financial security and has
the resources to deal with a variety of
adverse economic conditions. It comfortably
exceeds the minimum levels for all of our
rating criteria, and is likely to remain
healthy for the near future. However, in the
event of a severe recession or major
financial crisis, we feel that this assessment
should be reviewed to make sure that the
firm is still maintaining adequate financial
strength.
C Fair … fair financial security and is
currently stable. But during an economic
downturn or other financial pressures, we
feel it may encounter difficulties in
maintaining its financial stability
D Weak … currently demonstrates what
we consider to be significant weaknesses
which could negatively impact
policyholders. In an unfavorable economic
environment, these weaknesses could be
magnified.



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
E Very Weak… demonstrates what we
consider to be significant weaknesses and
has also failed some of the basic tests that
we use to identify fiscal stability. Therefore,
even in a favorable economic environment,
it is our opinion that policyholders could
incur significant risks.
F Failed … failed if it is either 1) under
supervision of an insurance regulatory
authority; 2) in the process of
rehabilitation; 3) in the process of
liquidation; or 4) voluntarily dissolved after
disciplinary or other regulatory action by an
insurance regulatory authority.
+ The plus sign is an indication that the
company is at the upper end of the letter
grade rating.
- The minus sign is an indication that the
company is at the lower end of the letter
grade rating.
U Unrated Companies. The company is
unrated for one or more of the following
reasons: (1) total assets are less than $1
million; (2) premium income for the current
year was less than $100,000; or (3) the
company functions almost exclusively as a
holding company rather than as an
underwriter; or (4) we do not have enough
information to reliably issue a rating.
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With a Letter Grading System,
What Grade is Good Enough?

Professor Joseph M. Belth, publisher of “The
Insurance Forum” says …
“A person trying to be ‘very conservative’ in his
choice of a financially sound insurance company,
should choose one that is represented in at least
two of the following four rating categories: the
top 3 categories of S&P or Moody’s, the top 2
categories of Fitch & the top 5 categories of
Weiss Ratings. The top 4 ratings of A.M. Best
could probably be added to this list. Companies
that meet this standard should be considered at
low risk for financial difficulty.”
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 Go
to www.imsaethics.org and learn
this organization’s mission statement:
– “To strengthen trust and confidence in the
life insurance industry by requiring
member companies to demonstrate
commitment to high, ethical marketplace
standards.”
– They evaluate companies that sell life,
annuity & long term care products.
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

Principles and Codes Each life insurance company subscribing to
these principles commits itself in all matters affecting the sale of
individually-sold life insurance, long-term care insurance and annuity
products:
1. To conduct business according to high standards of honesty and
fairness and to render that service to its customers which, in the
same circumstances, it would apply to or demand for itself.
2. To provide competent and customer-focused sales and service.
3. To engage in active and fair competition.
4. To provide advertising and sales materials that are clear as to
purpose and honest and fair as to content.
5. To provide for fair and expeditious handling of customer complaints
and disputes.
6. To maintain a system of supervision and review that is reasonably
designed to achieve compliance with these Principles of Ethical
Market Conduct.
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Membership Process



To become an IMSA member, an insurer must undergo a selfassessment process that involves responding affirmatively to all
questions in the IMSA Assessment Questionnaire, as well as to a
series of sub-questions.
The insurer must then undergo an assessment by an outside,
independent examiner such as an accountant, attorney, actuarial
or management consultant who is approved to assess that the
company has met these standards.
If the independent assessor determines that the insurer's
systems and programs to promote and maintain ethical behavior
meet IMSA's standards, the insurer earns IMSA membership for
three years. The assessment and review process must be
repeated every three years in order for a company to remain a
member of IMSA.
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IMSA


The Insurance Marketplace Standards
Association (IMSA). This relatively new tool is
for agents to use when evaluating insurers.
Starting April 1998, companies on the list are
committed to good market conduct practices. If
there is not the IMSA “seal of approval” on a
company you represent, or are thinking of
representing, you should ask why not?
How could you justify to your customer, writing
their insurance with an organization that
apparently does not take market conduct issues
very seriously?
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Reference Page
National Association of Life Underwriters
 www.amercoll.edu American Society of CLU
& ChFC
 American Council of Life Insurance
 insurance.yahoo.com/lh/policylapse.in.html
Yahoo! Finance

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Reference Page




www.ins.state.ny.us/rg003101.htm The
Office of General Counsel of the New York State
Insurance Department
www.faia.com/education/edlibrary/fees.cfm Florida
Association of Insurance Agents
www.naifa.org National Association of Insurance &
Financial Advisors
www.financialpro.org Society of Financial Service
Professionals
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Reference Page
www.ambest.com A.M. Best Ratings
 www.standardandpoors.com Standard and
Poor’s Ratings
 www.moodys.com Moody’s Investors Service
 www.fitchratings.com Fitch Ratings
 www.weissratings.com Weiss Ratings
 www.imsaethics.org Insurance Marketplace
Standards Association

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Thank you!










At this time, you may enter the ClassMarker website at
http://www.classmarker.com/embedded_quizzes/?quiz=3d
3e36d6ac508ce8d9085291988aff9e
For password type: ces2010
Click on Enter.
Provide the details requested on the following page.
Click on “Start Test”.
There is no time limit, however if you leave the test for
some time, it may require you to begin again.
It will show you (and I as the provider) your test results.
Upon completion of the test, call me at 913-980-2348,
and I will have you fax your signed affidavit to me.
My FAX number is 816-987-0461.
Upon receipt, I will fax your certificate to you and file the
results with the Insurance Department!
83