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Watch The Ratings Downgrades

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Downgrades in company ratings do make a difference, at least to some buyers. So, when the changes come, the advisors need to look sharp. Let’s begin with a couple of stories.

One acquaintance told me how irate he became when he learned that the carrier holding some of his retirement assets had a rating downgrade. He promptly pulled the money out and rolled it into a product from a higher-rated company.

How the customer learned of the rating, or what he understood of it, and whether he paid surrender charges, I do not know. But the producer who sold the original was out the renewals plus the potential for new business. Meanwhile, the producer who sold the new coverage was in for some new compensation and some future business possibilities.

Another acquaintance did something similar after her carrier changed hands. At the time of the transition, she was clueless about company ratings. Her policy, which she termed a “good policy,” transferred to the new carrier and that was that.

Then came renewal time. She became curious about this new company, so she did a little research. That’s when she learned the new company was rated B, not A like the original carrier. Boom! She was out of there.

Her explanation: “The renewal price and the new rating were not what I bought. This policy at this price and this rating is not worth it to me.” In this case, the producer who sold the policy was out the renewal and future business prospects, and the customer was out the coverage.

There are probably plenty of customers who do nothing when there’s a downgrade. They may not know about the change or they simply take it in stride. But some consumers do react, and it’s not only the ones whose assets are managed by high-octane wealth managers, attorneys and accountants who demand only the best for their clients.

It is not clear to me that either of the people described previously, or that most people, know the meaning of insurance company ratings or of changes to those ratings. The rating companies do provide commentary on their actions, but how many insurance customers read and understand those summaries? Curious individuals will always do some Internet research, of course, but what they read and what they retain can nebulous.

Who, then, is to provide the fine points of clarity? For example, who will provide information about the likely impact of a downgrade on a particular customer’s holding, the impact of canceling a contract and buying new or not buying another at all, or the impact on beneficiaries? Who? A very good agent or advisor is the likely candidate — someone who not only provides education and attention when the customer threatens to walk, but who also provides education and support all along the way.

In the examples described previously, if the producers who sold the original contracts had established a continuing and productive business relationship with the customer, I wonder if the outcomes would have been different. We’ll never know, but it’s likely the advisors would have had a good chance of at least retaining the clients if not the original contracts.

As for the company ratings issue, it pays to keep in mind that the relative importance of ratings to consumers tends to vary with the economy. Agents say that, in a weak economy, many consumers take a shine to products from top-rated carriers. But in environments characterized by rising interest rates or high-flying equities, demand soars for either fixed products crediting the highest rate or variable policies chock full of smokin’ subaccounts.

But even when a product is bought for its high rate or its amazing subaccounts, the company’s ratings could still become a priority for the client if a downgrade comes along. That’s the thing for producers to watch.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Connect with Linda →

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