How Healthy Is Your Insurance Vendor?

Cigna's recent announcement that it would reduce its workforce by over 1,000 positions, about four percent, to strengthen the company's competitive position during the economic downturn, signals the importance of vendor solvency issues in employer plans. "Concerns over vendor solvency will continue to emerge, leading to increased scrutiny of carrier ratings, service disruption and quality of service," said Dean Hatfield, Senior Vice President and Health Practice Leader, Sibson Consulting.

Cigna is not the first insurer to reduce its headcount as employer benefit cutbacks and the shift of costs to employees make it more difficult for health insurers to grow revenue. Last summer, United Health announced that it would reduce its head count by 4,000; last month Aetna announced that it will lay off 1,000 employees, slightly less than 3 percent of its workforce.

"It's always good [to check on insurers' financial ratings], especially on a disability program, which is a long term liability because people have to be paid benefits until age 65," says Hatfield. Life insurance is also important because of the large amounts of some of those claims, and the third area of importance is medical. It's a little less of a concern for companies that self insure but it's still not easy to switch administrators when trouble arises.

"For a big company it can take six month or more lead time to change whomever they partner with. If you don't keep a close watch on these companies, you could get caught in a very sticky situation where you have to migrate to another fully insured carrier -- or if you're self-insured, to a new administrator -- quickly and it won't be smooth."

Employers need to become more astute about financial ratings, which are changing much more rapidly now that the ratings of financial institutions have come under question. There are five major companies that publish financial strength ratings on insurance companies: A.M. Best Company, Standard & Poor's, Weiss Research, Duff & Phelps, and Moody's Investor Services.

"Those [financial institution] ratings have proven not to be as great as they should have been," says Hatfield.

This begs the question of whether insurance company ratings are any more solid.