AAMGA 75th anniversary: Monitoring quality of insurers a top priority for MGAs

Rough Notes, May 2001 by Pillsbury, Dennis, Zinkewicz, Phil

Watching out for potential insolvencies in a tighter market climate

Insurance company insolvencies are on the rise in the United States and that means that MGAs are going to have to be doubly careful when choosing the insurance companies with which they do business. This is especially true during a tightening market, when producers are likely to be less vigilant than during soft-- market periods.

The Weiss rating agency recently revealed that the rate of insurance insolvency in 2000 rose by 30%, compared with 1999. Martin Weiss, the chairman of the rating agency, attributed this rise in insolvencies to the increasing financial weakness in the property and casualty sector of the insurance industry. And there could be more to come, according to Weiss. "There's bound to be more bloodletting in this sector as the weaker companies are further pounded by a slowing economy," he said.

A recent article in the London-- based Reactions magazine said that the collapse of two of the largest private workers compensation carriers in California--Freemont and Superior National--helped to boost the number of insurers that went out of business to 35 in 2000, compared with the 27 carriers that went insolvent in 1999.

Actually, Freemont is not yet in insolvency but is under the supervision of a special examiner appointed by the California Department of Insurance. It is allowed to write new policies and can readjust its reserves for 1999 and previous years. However, Weiss rates as F (failed) all companies that are subject to regulatory action.

Reactions quotes Stephanie Eakins, a property and casualty analyst at Weiss, as saying: "Of the P-C companies that failed in 2000, 14 failures were due to being heavily under-reserved because of workers compensation losses and loss adjustments. The medical costs associated with these claims have risen faster than the companies had planned for. I think this is a trend we will definitely see more of due to the current trends in the medical industry."

Eakins said that two companies failed last year because of fraud: Credit General Indemnity and Credit General Insurance, which collapsed after false statements were filed and money was diverted from the companies. But they too were under-- reserved for workers compensation liabilities, Eakins observed.

The Weiss analyst also was quoted as saying that one company, LMI Commercial Insurance, failed because of increasing costs of asbestos claims and litigation.

"I think this is a trend we will see more of also," Eakins says. "There have been a number of manufacturers that have filed for Chapter 11 due to these claims."

Continued Eakins: "The one main underlying factor in all of the failures was adverse loss development. Many of the other companies were under-- reserved in long-tail business such as workers compensation, medical malpractice, excess and surplus lines. Also, losses were exceeding premiums due to the soft market and poor underwriting. Many companies were buying business by low-balling the prices so they could hang onto or get new business, regardless of risk, to keep the money coming in."

That view is shared by Ronnie Moore, an MGA with Southern General Agency in Bowling Green, Kentucky. Moore, who is also board liaison for the AAMGA's Legislative/Regulatory Monitoring Committee, says that one reason some companies are finding themselves in financial difficulty is that they have been trying to get market share at premium prices, rather than following Insurance Services Office suggested rates.

"I think a lot of companies just got themselves out of the underwriting mode and into the investment mode," Moore says. According to Moore, this is not a new scenario for the insurance industry. "Back in the 1970s and the early 1980s, many companies did the same thing," he says, referring to the cash flow underwriting years when insurers were sacrificing underwriting judgment in order to obtain premium dollars to invest. "In these perilous times, MGAs have to be careful in choosing the markets they work with, just as retail producers need to be careful in choosing which MGAs to work with."

Moore advises all producers to pay close attention to the rating organizations, such as A.M. Best and Standard & Poor's. "At our agency, we only do business with A or A rated companies. We rely on rating agencies' analysts," he says. As for checking out new, fledgling insurance companies, Moore says that Demotech is a rating agency that specializes in this area.

In addition to checking with rating agencies, Anthony Glotzbach, CPCU, of the New Albany, Indiana-- based United Brokers, Inc., says that producers should contact the insurance department in the states where insurance companies are domiciled.

"Most insurance departments ask companies in their jurisdictions for special reports that focus on the history of reserves versus their actual loss payments. That can also be a valuable tool for producers. In addition, look at a company's lines of business. If a company is heavily into long-tail lines, then producers should look into its reserves posture."