These problems, which include under-reserving, asbestos, the troubled workers' compensation line and diminishing investment income, will continue to be more difficult to overcome for smaller insurers, said Steven J. Dreyer, practice leader for insurance ratings at S&P, who co-authored the New York-based rating agency's study.

“That's always been the case for smaller, regional insurers. Their problems are no worse than bigger companies, but they don't have the diversification and the financial flexibility to mask those problems. They have less access to capital markets,” he said, adding that in 2002 figures, the vast majority of failed companies were also smaller, mutual companies operating on a regional basis.

“If you look at what caused the insolvency problem, one [cause] is workers' comp. That market has been troubled for a while, and insolvency is an end-result that may continue this year,” he said.

The A.M. Best study, titled “Rising Number of P-C Company Impairments Continues Trend,” cited a similar list of factors hurting p-c insurers. In addition, the Oldwick, N.J.-based rating agency said that insolvencies stemmed mostly from two notably troubled business lines.

Of the 38 companies that failed in 2002, about two-thirds provided coverage in commercial lines, predominantly workers' comp and some commercial-auto liability. The remaining one-third offered personal lines insurance, primarily private-passenger auto, the study said.

As opposed to sudden catastrophic events that triggered insolvencies in the early 1990s, insolvencies in 2002 primarily reflect the effects of long-term depressed pricing in these lines, the Best report said.

A.M. Best also pointed out that the main reason for insolvency has remained consistent over the past decade, with more than half of all such cases caused by insufficient reserves as well as inadequate pricing of the insurance product.

“This became more pronounced in the past three years, with 61 percent of insolvencies fully linked to this reason last year,” the report said.

While Mr. Dreyer said the industry is still recovering from severe underpricing and widespread reserve deficiencies, Robert Partridge, a managing director at S&P, speculated that if the hard market continues into next year, the insolvency number could begin to drop in 2004.

“Currently, the pricing is a lot better, but the reserving situation continues to be a problem,” Mr. Partridge said. In an analysis of the 25 largest p-c insurers last October, S&P found that more than a quarter had reserve deficiency problems.

The war in Iraq, Mr. Dreyer added, won't have an immediate impact on insurers at first, but there are some things to keep a close eye on. (See NU, Mar. 24, page 5.)

For 2003, A.M. Best said a new trend of companies falling victim to problems in the medical malpractice line has emerged. “It must be noted that in early 2003, several medical malpractice insurers have come under the supervision of their respective insurance regulatory authorities,” the study said.

A.M. Best predicted that, in the near term, the insurance industry will continue to experience a high insolvency rate. “Unlike year-end 2001, when a number of investors committed huge amounts of additional capital to the market, year-end 2002 appears to reflect an erosion of capital because of loss-reserve strengthening and investment losses,” it said.

Additionally, current market conditions and economic volatility continue to make it difficult for insurers to maintain strong balance sheets, the study said.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, suggested that failures among p-c insurers could be even more severe than what these insolvency rate studies indicate.

“The insolvency numbers show only part of difficulties experienced by insurers. Most companies never declare insolvency. In fact, they just dissolve and sell off their books of business in parts,” Mr. Hartwig said.

He noted that the increased insolvency numbers are consistent with past periods of difficulties, such as the liability crisis of 1980s.

“The hard market was unable to save companies from past underwriting and pricing sins, which, for most of these companies, led to inadequate reserves.

“I was not surprised there were a large number of insolvencies in 2002,” Mr. Hartwig said. “The upward trend could well continue in 2003.”

Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.