But rating guides do not necessarily reveal the entire picture. In the past two years, companies have gone out of business in a short time before the ratings reflected their weaknesses. UIC believes rating guides are a starting point, but assessing the soundness of a carrier requires ongoing data about a carrier's financial reserves, the types of investments it makes, and the type of businesses it underwrites. It is essential to evaluate the amount of a carrier's loss reserves. As recent economic patterns have demonstrated, some of these financial instruments are stronger than others.
Timing plays a critical role.
The types of businesses a carrier underwrites have an impact on its stability. For example, some companies have gone out on a financial limb by underwriting too much malpractice insurance. Executives also have to be sure that, at minimum, insurance companies under consideration are licensed to conduct business within the state in which they operate. This gives the company some protection under the state's insurance insolvency fund. However, state funds are no guarantee of adequate protection.