The number of insurers in financial trouble rose in 2011, according to a recent A.M. Best Company summary of p-c impairments from that year.
The data shows a concentration of impairments in the southern U.S., but impairments were spread from the Southeast to California to Vermont, with states such as Missouri scattered in between. Workers’ compensation was the most challenged line, but perhaps the most troubling revelation is the rise in insolvencies; it looks like an industry cycle getting ready to repeat itself with more above average years of insolvencies to come.
In the special report released last month, A.M. Best researchers review 28 property-casualty impairments from 14 states. Florida has the most financially impaired insurers with six, followed by Georgia with five, Illinois with four and Delaware with three.
Nine other states had one impaired insurer that triggered a state regulator to take action, according to the report. Those were in Alabama, Arizona, California, Minnesota, Missouri, North Carolina, New York, Utah, Virginia and Vermont.
Of the 28 insurers, A.M. Best analysts determined the line most often involved was workers’ compensation, with 22.4% of the impaired insurers principally writing that type of coverage.
Following workers’ compensation, all other commercial lines combined totaled 20.4%, according to the study. It comprises other liability, 8.2%; commercial multiperil, 6.1%; and commercial auto, 6.1%.
Personal lines combined was also a similar percentage at 24.2%, with private passenger auto at 12.2% and homeowners at 12.2%, according to the study.
The predominant lines of the remaining impairments came from atypical p-c lines of mortgage guaranty, title, financial guaranty and bail bond, according to the study, which is on the A.M. Best website for subscribers or for a fee.
For independent insurance agents, the most interesting realization from the report is a trend that, following peaks of industry profitability, there is a nefarious echo years later of an increase in p-c insurer impairments.
This trend is shown in the chart below. Peaks in insurer return on equity (ROE) are highlighted by the green bars and the number of p-c impairments are shown in the red line. One peak in insurer profitability is not shown—11.0% ROE in 1993—because it muddies the graphic clarity of the autocorrelation, but it too had a corresponding and lagged spike in impairments in 1997.
Source: Data on financially-impaired p-c insurers is from A.M. Best’s Special Report: Impairment Review; p-c industry ROE data is from the Insurance Information Institute.
Agents may want to consider preparing their businesses and staff for a potential increase in industry impairments and volatility it can bring to day-to-day agency operations. That can mean changes in client coverages, and such volatility is typically associated with increases in agency errors & omissions.
Big “I” members insured with Swiss Re Corporate Solutions and Westport can log in to the exclusive E&O Happens website to review tips for reacting to a carrier downgrade in the “Prevention Tools” section. Sample client letters for businesses written with unrated carriers, carriers rated below B+ or with excess & surplus carriers are also available on the website.
In addition, members are encouraged to consult state association staff on E&O needs, including resources such as E&O risk management classes. State agency E&O contact information is at www.iiaba.net/eo.