Aggressive growth in unusual lines could be early warning indicator of potential insolvency

It’s common for the management of an insurer facing insolvency to engage in aggressive marketing practices, according to a 2007 study conducted by the Property and Casualty Insurance Compensation Corporation (PACICC).
The study, ‘Why Insurers Fail,’ was presented at PACICC’s annual general meeting in Toronto. The 23-page report outlines lessons learned as a result of the insolvency of Maplex General Insurance Company in the mid-1990s.
Maplex was a 40-year-old insurance company bought in May 1993 by Transit Financial Holdings. In 1994, the company reported a net loss of Cdn$13.5 million, and its liabilities exceeded its assets by more than Cdn$1 million.
Maplex’s chairman, president and CEO, Jim Platis, resigned in November 1994 and was charged with fraud, theft and receiving secret commissions.
Among its key lessons, PACICC’s report notes Maplex changed its guidelines for auto insurance in 1991, writing classes of business the company had previously not written. And in 1992-93, the company went through a major purge of its property business and implemented rate increases of between 10% and 15%.
“It is clear that Maplex’s management lacked a well-developed strategy and plan for changes in its various lines of business,” PACICC noted in its report.
PACICC executive director Paul Kovacs noted at the AGM it’s “fairly common” to see failing companies “taking a gamble” and underwriting property and casualty lines significantly different than what they have before. The theory is that directors of failing companies feel that the business needs to grow rapidly in a new line of business or in a new territory in order to generate much-needed cash at the door.
But as one regulator noted during a question and answer session at the AGM, the problem with the strategy is that it embodies the same poor financial decision-making that got the company in financial trouble to begin with. For example, one way to grow business is to underwrite products at rates that simply aren’t actuarially supportable or sustainable.
“If premium levels for the business are not adequate, then that’s part of the problem,” Kovacs noted.