P&C Insolvency Exposure – 2001 to 2002

When the Sept. 10, 2001 issue of the Insurance Journal carried Demotech’s predictions on the maximum number of insolvencies that would occur in the property and casualty insurance industry over the period Jan. 1, 2002 through Dec. 31, 2002, who would have speculated that Sept. 11, 2001 would be one of the darkest days in American history?

Similarly, the popular wisdom in the financial markets was a moderation in the rate of growth associated with the stock markets. Few were predicting the most bearish of markets to suddenly be upon us. As we are nearly three-fourth’s of the way through 2002, it seemed appropriate to see how our prognostication was holding up.

Voluntary withdrawals, consolidations mergers
There have been a few voluntary withdrawals, mergers and acquisitions over the last several months. Perhaps the most intriguing have been the mergers of affiliates. My recollection is that the popular wisdom used to be separate companies for separate purposes and programs, or sell off the extra insurer. Yet during 2002 financially viable affiliates were merged.

Re-emergence of regional insurers
Regional insurers that have mastered the art of survival continue to prosper despite increased reinsurance costs, lower investment income opportunities and the impact of the equities markets on their investment portfolios. For the companies that we categorize as successful regional insurers, there is no back to basics; they have stuck to the basics.

Nationals that are less than national
The referenced article also noted that there could only be a limited number of national and international insurance companies that could be categorized as leaders. We noted that being licensed in all jurisdictions and writing a little bit of everything should not qualify a company as national or international. Even a widely licensed insurer with a national presence would be a niche player if they did not have the ability to influence their markets.

If you disagreed when we first wrote that commentary, look at the national and international insurance companies that have had rating downgrades, reserve strengthening or capital infusions since that date.

Our interim report card
In a Sept. 10, 2001 Insurance Journal article, Demotech Inc. predicted no more than 65 insolvencies during 2002. Despite the terrorist attacks on Sept. 11 and the uncertain economic environment, by our count, we have had but 27 failures.

Our interim report card is shown below. Based upon recent public information, it appears that 2002 is going to be a tough year as regards P&C insolvencies. However, it also appears that our Financial Stability Analysis Model has performed well.

One year after the terrorist attacks, the stock market slump and the onset of a hard reinsurance market, I can conclude this article with the same predictions that were presented one year ago.

Demotech expects fewer than 65 P&C insurance insolvencies among active P&C insurance companies during the period Jan. 1, 2001 and Dec. 31, 2002.

The P&C industry should anticipate voluntary withdrawals, consolidations and mergers due to the fact that some insurers are not positioned to improve their return on equity.

Regional insurers with strong balance sheets, revitalized distribution systems and below average financial leverage remain uniquely positioned to sustain focused growth in their niche markets.

National and international insurers face a struggle for leadership. There can only be so many leaders despite the size and complexity of the marketplace.

Topics Carriers Market Property Casualty