A New Look at Evaluation the Financial Condition of Property and Casualty Insurance and Reinsurance Companies

Over the past two years insurer solvency and the adequacy of the current regulatory process have been the subject of increasing scrutiny by all sectors of the financial and regulatory community. As a result of this concern and attention, several studies have been performed and reported regarding historical insolvency data. These studies provide much new information with respect to the causes of insolvency that can be incorporated into solvency evaluation reviews of property and casualty insurance and reinsurance companies. In this paper we survey results of some of the studies previously performed. We evaluate the ability to predict insolvency arising out of certain causes based upon a review of the historical ratings given by one rating agency to subsequently insolvent companies. We identify and discuss lessons from recent history implied from the studies and our analysis. After a brief discussion of solvency evaluation information commonly available, we perform analysis on a study group of 29 companies declared insolvent between 1985 and 1990. We demonstrate that the identification of major exposure areas can be performed relatively easily, and we suggest that any solvency evaluation be focused on the nature and extent of the relationship with the studied company, as well as on probable areas of exposure.