Only one of 17 property/casualty insurance carriers that became financially impaired in 2012 suffered its impairment as a result of catastrophe losses, according to a recent study by A.M. Best.

Identifying Millers First Insurance Company as the sole catastrophe-driven casualty in 2012, Anthony Diodato, a group vice president for the Oldwick, N.J.-based rating agency, noted that, for the most part, carriers “have gotten far more sophisticated and diligent in monitoring their concentrations.”

The lack of insolvencies arising from catastrophes demonstrates the success of carrier mitigation efforts—including reinsurance and policy nonrenewals—to avoid sudden, adverse consequences from storms and other weather-related events, Diodato said, noting that in each of the past two years, total catastrophe losses in North America exceeded $40 billion.

Looking back over more than 40 years covered in A.M. Best’s analysis of impairments, which dates back to 1969, Diodato notes that even over the longer-term, catastrophe losses have never ranked among the top five reasons for financial deterioration that leads to regulatory action.

The leading cause continues to be a combination of reserve deficiencies and inadequate pricing, he said.

“When you look at a study for 40 years and that keeps being No. 1, you would think the industry would be a little wiser. But sometimes reserving practices are not as conservative as they should be,” he said.

Scanning the list of impairments for 2012 presented in the A.M. Best report, a reader will see names like American Builders Insurance Co. RRG, Inc., Artisan Contractors Insurance Co. RRG, LLC, and Scaffold Industry Insurance Co. RRG. Inc.—raising the questions of whether carriers covering the construction industry or RRGs might have been particularly vulnerable last year.rubber stamp with inscription INSOLVENT

Diodato said A.M. Best did not have rating coverage on those companies, making it impossible for the rating agency to isolate any underlying theme related to the construction industry. He agreed, however, that “the macroeconomic conditions of a very down economy” in the United States over the last three or four years “has had an impact on the ability of some smaller companies to stay solvent.”

While four 2012 impairments were RRGs (Jamestown Insurance Co. RRG is the other on the list), Diodato didn’t suspect any connection between the ownership structure and the failure rate. “There are some well-run RRGs and we have coverage on many of them,” he said.

The 17 impairments recorded in 2012 came in well below the historical average of 25.8 over the 43 years studied, and represented half of the 34 impairments tallied for 2011, according to report. The report notes, however, that the total number of impairments for 2012 could rise at a future date. In fact, there were 14 impairments added to A.M. Best’s historical figures for the purposes of the report—seven on the life/health side and seven P/C impairments—that had not been captured in prior reports.

John Lafayette, senior manager/analytical services, explained that many of these companies are smaller and not among the companies for which A.M. Best provides ratings. “They’re not within our radar,” he said, adding that another reason the rating agency would find out about them years after they occur relates to “the practice of confidential supervisions” by regulatory authorities.

“A company could be under a confidential order for a year or more—and then if it makes it into rehabilitation or liquidation, it becomes public information at that point,” Lafayette said.

Two of the older P/C impairments that recently became known to A.M. Best—Garden State Indemnity and Homestead Insurance Co.—date back to 1998. The remaining five occurred between 2004 and 2010.

For 2012, the report lists one L/H carrier impairment in addition to the 17 P/C impaired carriers. According to the report, only five of the 18 were rated by A.M. Best within the three years leading up to the impairment—and none was rated in the secure range in the year of impairment.

For the purposes of its analysis, A.M. Best designates an insurer as financially impaired as of the first official regulatory action taken by an insurance department indicating that one or more of the following conditions is true:

  • The carrier’s ability to conduct normal insurance operations is adversely affected
  • Capital and surplus is inadequate to meet legal requirements
  • The carrier’s general financial condition has triggered regulatory concern.