In addition more and better data is typically but not always available with

In addition more and better data is typically but not

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emphasis has been placed on early intervention. In addition, more and better data is typically but not always available with which one can assess the financial strength of an insurer. Nonetheless, some of these weaknesses still exist, and new weaknesses have developed, that increase the risk of insurer insolvencies. Insolvencies arise from numerous causes. In many instances, there is more than one cause of the insolvency. Their causes include the following: Inadequate Rates 3 P&C Perspectives ( ) (last visited on June 9, 2006). © 2006 National Association of Insurance Commissioners 14
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Attachment Three Casualty Actuarial (C) Task Force 6/11/06 This is widely believed to be among the most significant factors contributing to insurer insolvency. However, inadequacy of premium rates is often related to other company risk problems, for example, growth in lines and areas in which the company has little to no competency. The cause of the inadequate rates may be related to optimistic estimates of ultimate losses for the policy year for which prices are being determined. This is generally due to optimistic estimates of ultimate losses on prior policy years, which, in turn, is linked to insufficient loss reserves. The optimistic estimate of ultimate losses for the upcoming policy year may also be attributed to an insurer overriding reasonably accurate estimates of ultimate losses with an overly optimistic assessment of the impact of improvements in the insurance environment. Such changes could include claims handling, reunderwriting, court precedents, and other factors, both internal and external to the insurer. Alternatively, inadequate rates may be due to excessive expenses or insufficient investment income, although these causes generally do not result in insurer insolvency. More recent examples of insurers that became insolvent principally because of inadequate rates include the following: o Reliance Insurance Company – This was a large writer of numerous coverages with a heavy emphasis on workers’ compensation. Reliance ceased writing all business in June 2000 and was ordered into rehabilitation in May 2001. 4 Inadequacy in rates is one of numerous issues that drove Reliance into insolvency. The 1998 statutory annual statement showed $1.7 billion of surplus, the highest in the company’s history. 5 The 1999 statutory annual statement showed $1.2 billion of surplus, which was 24% lower than the 1998 surplus. 6 This reduced surplus also indicated that Reliance was at “Company Action Level” of the Risk Based Capital calculation. There were several contributing factors to the decrease in surplus, including inadequate rate and pricing levels. Reliance’s written premium grew in excess of 10% per year in the late 1990s, a time characterized by aggressive pricing. This 10% growth indicated exposure growth in excess of 10%. The Pennsylvania Insurance Department (PID) also cited larger and more frequent claims in certain types of high-risk business, requiring an increase in loss reserves and, therefore, ultimate loss estimates.
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