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Monitoring Financial Institutions

Chris Farrell Mar 3, 2008

Question: In tough times like these, how do I monitor the health of my insurance company and bank? Sure the bank is FDIC insured but getting money back from the government can’t be easy or efficient, how do I protect myself? Thanks in advance, Tim

Answer: This is a timely question. Federal Reserve Board chairman Ben Bernanke recently testified before Congress that he expects some small banks to fail. A number of insurance companies have also reported losses from subprime mortgage investments.

As you mention, the key with banks is to make sure it is backstopped by the Federal Deposit Insurance Corporation. The FDIC website has a clear explanation of the insurance basics. The basic insurance amount is $100,000 per depositor per insured bank. However, certain retirement accounts like IRAs, are insured up to $250,000 per depositor per insured bank. Now, there are a variety of ways to increase that insurance limit depending on the type of account. But most people are well below that $100,000 and, if that’s the case, the FDIC is good sleep insurance. By the way, the FDIC has a sound reputation for restoring access to your money after a bank failure. This is from their website:

It is the FDIC’s goal to make deposit insurance payments within one business day of the failure of the insured institution. Typically, a bank that has failed will be closed on a Friday. The FDIC will then work the weekend to complete deposit insurance determinations for most deposits and be prepared on Monday to either transfer the insured portion of a deposit to another FDIC insured institution or provide deposit insurance payment checks.

Insurance companies are regulated by the states, and the track record of state regulation is uneven (to put it charitably). Even the information for concerned consumers isn’t easy to find. For instance, if you head to the FDIC website you can get most if not all of your questions answered. Now try and do the same information at the National Association of Insurance Commissioners website, the umbrella organization for state insurance commissioners.

Anyway, property and casualty, life and health insurers are backed by various state “guaranty funds”. Here is the money quote from the National Organization of Life & Health Insurance Guaranty Associations:

Insurance companies that experience severe financial difficulties are taken over by the insurance department of the state in which they are based. You should be notified by the insurance department if this occurs. Even if the company is placed under the control of the insurance department, claims will continue to be honored as long as premiums are paid or cash value exists. The claims will be covered by state guaranty associations, which will either pay them directly or transfer the policies to a financially stable insurance company.

When it comes to insurance companies you’ll want an extra layer of financial comfort. I prefer blue chip companies with high credit ratings from Moodys and Standard & Poor’s.

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