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The Demotech Company Classification System, established in the Feb. 12, 2007 issue of Insurance Journal, categorizes insurers into one of 11 categories based on an analysis of data reported by the companies to the National Association of Insurance Commissioners.
The 11 categories that comprise the classification system are Nationals, Near Nationals, Super Regionals, Regionals, State Specialists, Coverage Specialists, Strategic Subsidiaries, Risk Retention Groups, Surplus Lines Carriers, Reinsurers and companies with less than $1 million in direct premium written. A company can be assigned to only one category in the Demotech Company Classification System. Therefore, a company not designated as a Near National is assigned another classification, perhaps National, Super Regional, Regional, or State Specialist.
To qualify as a Near National, a carrier must meet the following criteria as of Dec. 31, 2014:
• More than $1 million of direct premium written in each of at least 35 states;
• Policyholders’ surplus of at least $100 million;
• $100 million or more of direct premium;
• $50 million or more of net premium;
• No line of business greater or equal to 90 percent of direct premium volume;
• No state greater or equal to 90 percent of direct premium volume;
• May not be a surplus lines carrier, risk retention group, or reinsurer;
• Does not qualify as a National (more than $1 million of direct premium written in each of at least 45 states, $250 million or more of surplus, net premium written and direct premium written).
To develop our list of Near Nationals, Demotech reviewed 2,639 individual property/casualty insurance companies and assigned them to a category in the Demotech Company Classification System. Only 51 insurers met the criteria to be designated a Near National.
When analyzing the companies classified as Near Nationals for 2015, we noted several interesting observations. Of the 51 individual carriers classified as Near Nationals for 2015, 28 were also identified as Near Nationals for 2014 and 2013, and 12 have been Near Nationals since the introduction of our classification system in 2007. The vast majority, 47 of the 51 companies, are stock companies.
All but one of the Near Nationals are members of a property/casualty insurance group, with six from Travelers Group, four from both Berkshire Hathaway and Hartford Fire & Casualty, and three from XL America. No other group has more than two Near Nationals for 2015.
By count, the 51 Near Nationals comprised just under 2 percent of the 2,639 carriers that we reviewed; however, they wrote approximately 6.5 percent of the 2014 direct premium reported by the P/C insurance industry.
The Near Nationals also represented approximately 16.7 percent of the P/C industry’s reported policyholders’ surplus at year-end 2014. Clearly, this level of financial presence demonstrates the importance of the Near Nationals. They are critical to the smooth functioning of the P/C insurance market. The Near Nationals facilitate commerce and trade, and are an important component of the total P/C industry.
In reviewing the 2014 direct premium written by the Near Nationals, there were only six states in which all 51 Near Nationals wrote at least $1 million: Arizona, Georgia, Illinois, Missouri, Pennsylvania and Virginia. The 2014 direct premium written was distributed relatively evenly between auto, commercial multi-peril/other liability, homeowners/property, and workers’ compensation. See the corresponding chart for line of business distribution detail.
Near Nationals may be small in number; however, the 51 carriers comprising the Near Nationals for 2015 are substantial insurers, critically important to the P/C insurance industry, as demonstrated by their significant market share and impressive balance sheets. The coverages that they write permit consumers and businesses to transfer risk and thereby facilitate the placement of insurance products necessary to support the American economy with this remarkably stable group of carriers capable of honoring meritorious claims.
Koestler II is the chief ratings officer of Demotech Inc., a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers. Since 1985, Demotech has served the insurance industry by assigning Financial Stability Ratings® (FSRs) for property/casualty insurers and title underwriters. FSRs are an indicator of financial stability. Demotech is the Official Research Partner of Insurance Journal. Website: www.demotech.com.