Insolvencies Still Up In 2002, A.M. Best Says

NU Online News Service, March 13, 3:15 p.m. EST?In 2002, 38 property-casualty insurers were placed either under regulatory supervision or into liquidation, according to Oldwick, N.J.-based insurance rater A.M. Best Co.

In its new report, "Rising Number of P-C Company Impairments Continues Trend," A.M. Best said the figure from last year is greater than the pace experienced by property and casualty insurance companies in 2000 and 2001, when there were 30 insolvencies in each year.

"Several years of inadequate pricing, escalating loss costs, and the need to strengthen loss reserves fueled declining operating profitability and further weakened balance-sheet strength," the report stated. This caused many of the companies with severely leveraged surplus to fail, according to the study.

Current market conditions and economic volatility continue to make it difficult for p-c companies to maintain strong balance sheets, it said.

A.M. Best said the insolvencies stemmed mostly from two notably troubled business lines.

Of the 38 companies that failed in 2002, about two-thirds provided coverage in commercial lines, predominantly workers' compensation and some commercial-auto liability.

The remaining one-third offered personal-lines insurance, primarily private-passenger auto. The insolvencies primarily reflect the effects of long-term depressed pricing in these lines, as opposed to sudden catastrophic events that triggered insolvencies in the early 1990s, according to A.M. Best.

The study also pointed out that the main reason for insolvency has remained consistent over the past decade, with more than half of all such cases caused by insufficient reserves and-or inadequate pricing of the insurance product. This became more pronounced in the past three years, with 61 percent of insolvencies fully linked to this reason last year, the report said.

One new trend in 2003 A.M. Best discussed was exposures in medical malpractice. "It must be noted that in early 2003, several medical-malpractice insurers have come under the supervision of their respective insurance regulatory authorities," the study said.

A.M. Best predicted that in the near term, the insurance industry will continue to experience a high insolvency rate.

"Unlike year-end 2001, when a number of investors committed huge amounts of additional capital to the market, year-end 2002 appears to reflect an erosion of capital because of loss-reserve strengthening and investment losses," the report said.

Special Reports /

Insolvencies Still Up In 2002, A.M. Best Says

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