March 12, 2003 by Canadian Underwriter
The sins of the past continued to haunt U.S. insurers as insolvency levels remained high in 2002, says a new report from A.M. Best. Last year, 38 U.S. p&c insurers were either placed under regulatory supervision or into liquidation. There were 30 insolvencies in each of 2000 and 2001.
“Several years of inadequate pricing, escalating loss costs and the need to strengthen loss reserves fueled declining operating profitability and further weakened balance-sheet strength,” states an A.M. Best press release. “This caused many of the companies with severely leveraged surplus to fail.”
The largest insolvencies last year were Highlands Insurance Group and Legion Insurance Group, but the majority were small, state or regional carriers.
Commercial lines, specifically workers’ compensation and commercial auto liability, was written by two-thirds of the failing companies. Long-term price deficiency was the cause of the failure, rather than sudden catastrophic loss, says A.M. Best. Insufficient reserving/inadequate pricing has been the trend in failing companies for the past decade, but has become more pronounced since 2000.
Although only one of the failing companies had significant medical malpractice exposures, the report notes that in early 2003 several med-mal insurers have come under regulatory supervision.
In fact, 2003 is expected to bring further insolvencies, the report concludes. “Unlike yearend 2001, when a number of investors committed huge amounts of additional capital to the market, yearend 2002 appears to reflect an erosion of capital because of loss-reserve strengthening and investment losses.”