It is clearly in your interests to choose a sound insurance company with which to take out a policy, and it is therefore desirable to have some criterion for selection. Unfortunately, this is not an easy matter. While one can certainly say that the large old-established life insurance companies in the UK are generally sound, one equally cannot say that all small or recently formed companies are unsound. It is often the small and enterprising new company that introduces a new and attractive policy which is not available from its larger competitors. The "young" company has every incentive to be competitive because it has a harder job getting new business than its established rivals. This may lead it to promise more to policyholders than it can really afford or deliver. But most small companies develop perfectly soundly without doing so. If you are in doubt about the soundness of a small proprietary insurance company there are some facts that are helpful to know, though they will not provide the final answer.
The first question is: how small really is the company? Some companies make great play with figures - "assets of over £150 million" may sound impressive, but this is a small amount in life insurance company terms. In any case the bulk of this may well be represented by single-premium policies or annuities. It does not tell you how much business the company is transacting: for this you need to know the amount of its annual premium income derived from regular premium policies. If it is less than £12 million it is a small company; several large offices have annual premium income of over £150 million.
The next question is: how strong is the company's financially position? Three facts are relevant here. First, what is its paid-up share capital? This represents the amount the owners of the company have put at risk. It must be looked at in relation to the accumulated surplus or deficit the company has on its life fund. Thus a small company may have a paid-up share capital of, say, £12.5 million but have a deficit on its life fund of £12 million. This means it has spent £12 million in developing its business and has only £1500,000 of free capital left. If, on the other hand, it had a surplus of £1500,000, then its capital resources would be £12 million.
Secondly, how strong is the actuarial valuation basis? A surplus of £1500,000 in relation to a prudent valuation of liabilities could offer better protection than a surplus of £12 million in relation to a very weak valuation basis. Relevant though this factor is, it unfortunately usually requires an actuary to interpret it.
Companies which sell largely through part-time agents vary widely in their attitudes to selection. The "granting of an agency", the empowering of an individual to sell a company's policies, is not legally restricted and a company may select whom it likes.
Some companies are far less demanding about qualifications and experience than others, and, while some will generally restrict themselves to people with professional qualifications, others will allow the local garage owner to have an agency if he reckons he can sell policies.
Clearly the composite companies (those which transact... see: Agents and Brokers