What happens when the excess carrier goes under

Analysis of one typical large company’s 65 years of excess casualty programs turns up disturbing news. More than half of the 49 carriers that participated on this corporation’s excess programs are now insolvent or impaired enough to be considered serious potential vulnerabilities.

If the company now settles a liability claim from years ago and expects one of these now-contaminated historical excess programs to pay, it will be out of luck. A substantial portion of the insurance will probably be unable to respond. This is, of course, insurance for which the corporation paid in full years before. And the lower in the insurance program an insolvent carrier resides, the worse it will be for the corporation, since the insurer that sits above the bankrupt insurer is not obligated to pay until the layer below has fulfilled its obligations.

Living with ghosts of the past
Such uncollectible claims are not uncommon. Excess casualty combines occurence policy forms with long-tail liabilities, meaning that carriers are often not called upon to pay claims until many years, even decades, after a policy is originally written and the premium collected. A lot happens in that time. The more than 230 insurer and reinsurers that have become insolvent in the past decade are testimony to that.

Among these insolvent carriers are many once-significant players in the excess casualty market. Their demise has left numerous corporations with uncollectible excess casualty claims and no recourse but to pay these large claims out of company coffers. Many risk managers may have thought they had recourse in state-regulated guaranty funds, only to discover that these funds generally fall far short when it comes to helping large companies recoup large liability losses from insolvent insurers.

Erasing weaknesses in past programs
Fortunately, new tools are giving risk managers not only recourse, but the means to mount a proactive strategy to combat insolvency-related losses. A new coverage allows companies to eliminate insolvency- related weaknesses that already exist in past excess casualty programs. In essence, this coverage gives the risk manager the power to rewrite history and infuse stable capacity into excess casualty programs specifically where vulnerabilities now exist ebecause a carrier has become insolvent. Where the carrier originally chosen has faltered, the risk manager now has the chance to choose again!

In this manner, insurance buyers today can shore up weaknesses in excess casualty programs dating as far back as 15 years.

Building solid structures for the future
Experience has shown that an insurer’s financial decline frequently comes with little warning. Many now-insolvent carriers appeared stable to many just months before their liquidation. Buyers have realized this and emerged from the industry’s epidemic insolvencies with new wisdom and new practices to mitigate the likelihood that they will fall victim to insolvency-related exposures going forward. They now routinely bring a significantly higher level of due diligence to the insurance buying process.

Central to this new level of due diligence is a comprehensive assessment of any prospective carrier’s financial condition. While years ago such an assessment began and ended with financial strength ratings, it now also encompasses the senior debt ratings of the insurer or its parent company and any public financial reports of insurers. Even a carrier’s reinsurance buying patterns are considered whenever possible.

Buyers have found that a carrier’s experience reserving for claims can raise a red flag. An A.M. Best study of insolvencies from 1969 to 2002 cites inadequate reserves as the leading cause of insolvency. If a carrier is making severe adjustments to its reserves on a regular basis, trouble could be ahead.

Consistency and experience in the excess casualty market are recognized as other reliable benchmarks. Does the carrier jump in and out of the excess casualty market? Is it volatile in pricing, terms and conditions? If it seems to be writing to win market share, beware. The same A.M. Best study pointed to rapid growth as a potential forewarning of failure.

As one might predict, now that many risk managers have paid for policies that later proved literally not worth the paper on which they were printed, price routinely takes a backseat.

Finally, some risk managers that have suffered insolvent insurers report that their only early warning sign was a subtle decline in the carrier’s service to policyholders. Consequently, many have added a careful evaluation of a carrier’s service infrastructure and performance to their checklists and find substantial service investments reassuring.

Christopher Maleno is the president of AIG Excess Casualty.

Topics Carriers Claims Excess Surplus Risk Management Casualty