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

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

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

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"Several years of inadequate pricing, escalating loss costs, andthe need to strengthen loss reserves fueled declining operatingprofitability and further weakened balance-sheet strength," thereport stated. This caused many of the companies with severelyleveraged surplus to fail, according to the study.

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

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

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

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

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The study also pointed out that the main reason for insolvencyhas remained consistent over the past decade, with more than halfof all such cases caused by insufficient reserves and-or inadequatepricing of the insurance product. This became more pronounced inthe past three years, with 61 percent of insolvencies fully linkedto this reason last year, the report said.

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One new trend in 2003 A.M. Best discussed was exposures inmedical malpractice. "It must be noted that in early 2003, severalmedical-malpractice insurers have come under the supervision oftheir respective insurance regulatory authorities," the studysaid.

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

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"Unlike year-end 2001, when a number of investors committed hugeamounts of additional capital to the market, year-end 2002 appearsto reflect an erosion of capital because of loss-reservestrengthening and investment losses," the report said.

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