Fiscal fitness.When insurers become insolvent--the insurance world's rough equivalent of bankruptcy--the consequences can be dire for policyholders with outstanding claims against a failed company. To protect policyholder Policyholder An individual who owns an insurance policy. interests, the regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. response to an insurer's financial impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. is distinct from the bankruptcy proceedings bankruptcy proceedings n. the bankruptcy procedure is: a) filing a petition (voluntary or involuntary) to declare a debtor person or business bankrupt, or, under Chapter 11 or 13, to allow reorganization or refinancing under a plan to meet the debts of the party that noninsurance companies undergo when they fail. The regulator regulator, n the mechanical part of a gas delivery system that controls gas pressure that allows a manageable flow of drug vapor to escape. regulator see reducing valve. in the troubled insurer's state of domicile state of domicile n. the state in which a person has his/her permanent residence or intends to make his/her residence, as compared to where the person is living temporarily. may place the company under supervision or take other action to conserve the company's assets even before an actual insolvency insolvency Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet occurs. Depending on the severity of the impairment, the troubled insurer An individual or company who, through a contractual agreement, undertakes to compensate specified losses, liability, or damages incurred by another individual. An insurer is frequently an insurance company and is also known as an underwriter. may be rehabilitated, sold or liquidated DAMAGES, LIQUIDATED, contracts. When the parties to a contract stipulate for the payment of a certain sum, as a satisfaction fixed and agreed upon by them, for the not doing of certain things particularly mentioned in the agreement, the sum so fixed upon is called liquidated damages. (q.v. . In most states, guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. funds, maintained through assessments on all insurers doing business in the state, are available to help make up any shortfall Shortfall The amount by which the capital required to fulfill a financial obligation exceeds available capital. Notes: Shortfall risk is often combated with an efficient hedging strategy created by a fund, group, institution, or individual. in a failed company's assets. A.M. Best has done extensive studies on the frequency and causes of impairment and insolvency. Impairments have been relatively rare; average annual rates of impairment were about one in 125 property/casualty companies from 1969 to 2002, and about one in 109 life/health companies from 1976 to 2002, based on A.M. Best's research. Inadequate pricing and rapid growth proved hazardous across the industry, ranking among the leading causes of financial impairment for insurers.
Cumulative Average Impairment Rates
Secure vs. Vulnerable Best's Ratings
U.S. life/health and property/casualty industry data 1977 to 2002
[GRAPHIC OMITTED]
Source: Special Report: Best's Insolvency Study, property/Casualty U.S.
Insurers 1969-2002 (Published 05/24/2004) and Special Report: Best's
Insolvency Study, Life/Health U.S. Insurers, 1976-2002 (Published
01/03/2005)
U.S. Property/Casualty Insurers,
Impairment Frequency by Domicile
1969 to 2002 (%)
LA 4.22
WY 3.90
FL 3.09
VI 2.90
MT 1.97
AZ 1.77
PR 1.72
UT 1.65
NV 1.64
CA 1.60
WV 1.55
NM 1.49
TX 1.39
RI 1.25
OK 1.24
OR 1.19
GA 1.19
MO 1.18
SC 1.17
CO 1.06
NE 0.99
NJ 0.97
HI 0.93
GU 0.92
NY 0.87
AK 0.86
KY 0.84
MA 0.82
PA 0.82
MD 0.75
MS 0.74
DC 0.73
TN 0.70
IL 0.68
IN 0.64
AL 0.54
DE 0.53
OH 0.44
MI 0.43
KS 0.41
WA 0.35
VA 0.34
NH 0.29
NC 0.28
AR 0.27
ME 0.26
SD 0.23
WI 0.23
CT 0.17
IA 0.15
MN 0.09
VT 0.06
ND
ID
U.S. Life/Health Insurers,
Impairment Frequency by Domicile
1976 to 2002 (%)
NM 5.95
AK 4.13
MT 3.13
ID 2.86
WY 2.03
FL 1.95
OK 1.91
LA 1.88
WV 1.74
WA 1.64
NJ 1.57
TX 1.56
OR 1.56
AL 1.53
AR 1.29
CO 1.25
ND 1.23
CA 1.22
VA 1.22
IN 1.15
HI 1.12
PA 1.09
UT 0.99
GA 0.94
MI 0.94
MO 0.93
NC 0.91
MS 0.73
TN 0.72
VT 0.70
IL 0.70
KS 0.66
NE 0.59
MA 0.59
DE 0.56
AZ 0.55
KY 0.53
SD 0.51
MD 0.47
RI 0.46
OH 0.38
SC 0.34
WI 0.34
MN 0.29
PR 0.29
NY 0.24
IA 0.21
CT 0.17
VI
NV
NH
ME
GU
DC
Note: Table made from bar graph.
Source: Special Report: Best's Insolvency Study, Property/Casualty U.S.
Insurers 1969-2002 (Published 05/24/2004) and Special Report: Best's
Insolvency Study, Life/Health U.S. Insurers, 1976-2002 (Published 0
1/03/2005)
U.S. Property/Casualty Insurers,
Impairment Frequency by Year
1969 to 2002 (%)
[GRAPHIC OMITTED]
Source: Special Report: Best's Insolvency Study, Property/Casualty U.S.
Insurers, 1969-2002 (published 05/24/2004)
U.S. Property/Casualty Insurers,
Primary Causes of Impairment
1976-2002 (%)
Deficient Loss Reserves 37.2
Rapid Growth 17.3
Miscellaneous 9.8
Alleged Fraud 8.5
Overstated Assets 7.8
Catastrophe Losses 6.9
Significant Change 5.0
Impairment of an Affiliate 3.7
Reinsurance Failure 3.7
Source: Special Report: Best's Insolvency Study, Property/Casualty U.S.
Insurers, 1969-2002 (Published 05/24/2004)
Rating Distribution, Property/Casualty Industry
December 2004, based on ratings units
[GRAPHIC OMITTED]
Special Report: Review/Preview, Property/Casualty 2005, Anticipation is
Making Me Great (Published 01/25/2005)
U.S. Life/Health Insurers,
Impairment Frequency by Year
1976-2002 (%)
[GRAPHIC OMITTED]
Source: Special Report: Best's Insolvency Study, Life/Health U.S.
Insurers, 1976-2002 (Published 01/03/2005)
U.S. Life/Health Insurers,
Primary Causes of Impairments
1976-2002 (%)
Inadequate Pricing 22.7
Affiliate Problems 20.1
Rapid Growth 16.7
Investment Problems 14.1
Miscellaneous 10.0
Alleged Fraud 8.6
Significant Change
in Business 5.2
Reinsurance Failure 2.6
Note: Table made from bar graph.
Source: Special Report: Best's Insolvency Study, Life/Health U.S.
Insurers, 1976-2002 (Published 01/03/2005)
Rating Distribution, Life/health Industry
2002-2004
[GRAPHIC OMITTED]
Source: Special Report: Life/Health Rating Upgrades Outnumbered
Downgrades in 2004 (01/31/2005)
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