A.M. Best: P/C Insurer Financial Impairments Triple Since 2007

June 25, 2010

The number of financial impairments for U.S. property/casualty (P/C) insurers have more than tripled since 2007, the last full year before the current recession, rising to 18 in 2009, up from 16 in 2008 and from five in 2007. A.M. Best Co. says that six of the 2009 impairments were homeowners and residential insurers affecting some 200,000 policyholders.

2010 has already seen four P/C financial impairments, according to A.M. Best, although the full development of 2009 and 2010 impairments may not be evident for some time. Overall, this year’s study has an additional 45 companies, seven of which were for 2008, the rating agency says.

Over the past 41 years of A.M. Best’s study, the rating agency found that the financial impairment frequency (FIF) typically rises during and shortly after periods of economic and financial market stress. The experience for 2008 and 2009 has been no exception.

— Most of the 2009 P/C impairments resulted from under reserving, underpricing and too rapid growth in the years immediately preceding impairment. Only three impairments were directly attributable to investment problems/understated assets. Three 2009 impairments were related to alleged fraud, and another two were caused by affiliate problems.

— By line, homeowners and residential (6), workers’ compensation (4) and commercial auto liability (4) accounted for 78 percent of the P/C impairments last year. The other four impairments were one each for financial guaranty, medical professional liability, private passenger nonstandard auto and title insurance.

— A.M. Best expects the number of financially impaired companies and the FIF to rise in the near term as insurers absorb ongoing underwriting and investment losses, and as regulators take control of companies for which they have been unable to find buyers.

Source: A.M. Best Company, www.ambest.com

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