Financial Risks

Perspective of Claimant

From the claimant's perspective, structured settlements are not an acceptable form of settlement unless there is confidence that all future payments will be made in full. This concern arises because of a condition imposed by federal tax law: as a condition to receiving a structured settlement tax-free, the claimant may be no more than a general creditor of the obligor. This means that the claimant is not allowed to improve his creditor rights by taking a security interest in property owned by the obligor. Instead, the claimant receives only a contract right against the obligor. The value of this contract right depends on the obligor's creditworthiness.

Evaluating Financial Strength

A. M. Best Company is an excellent source for evaluating the financial strength of insurance companies. A. M. Best Company evaluates life insurance companies in an annual volume entitled Best's Insurance Reports - Life/Health. It evaluates casualty companies in a separate volume entitled Best's Insurance Reports - Property/Casualty. Both volumes use two ratings for each company: an overall rating represented by a letter and a financial class rating represented by a numeral.

  1. Best's Letter Rating. Best's letter ratings include: A++ (Superior), A+, A, B+, B, C+, C, and C- (Marginal). These ratings reflect A. M. Best Company's opinion of the relative strength of each company compared with other life insurance companies or property and casualty companies. This rating system uses tests that analyze a company's long-term ability to discharge its responsibilities. Specifically, the following factors are evaluated: 1) competency of underwriting; 2) cost control and efficiency of management; 3) types; 4) adequacy of net resources to absorb unusual economic shock; and 5) soundness of investments.

  2. Financial Class Rating. Letter ratings do not indicate the financial size of a company. For this purpose, A. M. Best Company assigns class ratings based on policyholders' surplus (i.e., capital and surplus funds in stock companies and surplus funds in mutual companies) plus Best's adjustments to selected balance sheet items including equity in unearned premiums; adequacy of loss reserves on a present value basis; adjustments to market value of bonds; preferred stock and mortgages; and conditional reserves. Financial size categories are indicated by a roman numeral ranging from I (the smallest) to XV (the largest).

  3. Other rating agencies include Standard & Poor's, Moody's, and Duff & Phelps. Duff & Phelps should also be considered when evaluating the financial strength and claims-paying ability of insurance companies.

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