Best Study Finds Insurers' Insolvency Causes
NU Online News Service, May 25, 9:26 a.m. EDT?A new study examining insolvency by U.S. property-casualty insurers finds that small, commercial-lines focused, public insurers have the highest risk of collapse, with deficient loss reserves and poor pricing being the leading cause, according to A.M. Best.[@@]
The Oldwick, N.J.-based rating firm said it examined 871 financially impaired p-c insurers dating back 34 years and identified the main causes of impairment for 562 companies. Among those, the leading cause of impairment, at 37.2 percent, was deficient loss reserves/inadequate pricing.
Rapid growth?which is also closely related to inadequate loss reserves?was the second highest cause of impairment at 17.3 percent, according to A.M. Best.
Suspected fraud was the third highest identified cause at 8.5 percent. The ratings firm said that with the possible exclusion of catastrophe losses, all the primary causes of insolvencies in the study reflect "some form of mismanagement."
Best also added that the financially impaired companies in the study tended to be stock companies, where the impairment frequency was about four times that of mutual companies, at 1.2 percent versus 0.3 percent.
The most impaired insurers had small premium volume, and the majority wrote commercial lines?which experienced more volatile underwriting results and lower profitability, particularly during the 1980s and 1990s.
The Best study also noted that impairment rates in 2000 to 2002 spiked, albeit short of the record high set in 1991. Even so, impairments remain relatively rare?about one in 200 companies in more stable times and one in 50 during more difficult periods, according to A.M. Best.
Over the 34 years of the study period, impairments averaged 25.6 annually, with an average annual impairment frequency of 0.80 percent, or one in 125 companies, according to the study.
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