Holes in the Net?

Insurers' woes are mounting -- and your company's coverage may be at risk.

The scary thing about the demise of Reliance Insurance Co. was the sheer speed of it. As recently as December 1998, the property/casualty company was reporting a $1.7 billion statutory surplus, the biggest in its 181-year history. That same year, Reliance also boosted its profit to $585 million, a huge increase from the $62 million in earnings it recorded the year before.

But then, out of nowhere, Reliance fell into a tailspin. By the end of 1999, an onerous debt load and heavy workers’-compensation reinsurance losses had pushed the insurer toward the brink of insolvency. In its 1999 annual statement, Reliance management acknowledged that the company had lost $500 million of its surplus, on the heels of a $177 million loss in net income. That was followed by another net income loss of $198 million in 2000. A resultant salvage attempt by state insurance regulators failed, and in October 2001, M. Diane Koken, Pennsylvania’s insurance commissioner, ordered the liquidation of the venerable company.

In the end, Reliance’s liabilities outstripped its assets by $1.2 billion, making it the largest insurer liquidation in U.S. history, according to the Insurance Information Institute (III). But the size of the failure wasn’t the only thing that disturbed commercial insurance buyers; many wondered why Reliance’s financial woes had slipped under the radar of some top rating agencies for as long as a year. In fact, up until June 2000, A.M. Best Co. rated Reliance’s financial strength as an A- (excellent), while Standard & Poor’s assigned the insurer an A- (strong), according to Schiff’s Insurance Observer.

Wayne Salen, then director of risk management for New Millennium Care, a nursing-home operator and customer of Reliance, recalls watching anxiously as the insurer’s Best rating plunged first to a “secure” B++ (very good), then to a “vulnerable” B (fair) in little more than a month. And, although Salen was able to secure coverage with a new carrier, he worries that the Reliance debacle may not have been a one-off event. “It was shocking how fast it happened,” he recalls. “It makes it incumbent on us to check the ratings quarterly — or even monthly.”

Watch the Watchers

Salen is not alone in worrying about the health of the insurance industry. To a fair number of seasoned buyers, the reliability of corporate insurance policies has not been this shaky since the mid-1980s.

That’s saying something. During that previous period, key liability coverages became practically unavailable, and 100 percent premium boosts were not uncommon. In addition, massive failures, such as those of Transit Casualty, Mission Insurance, and Integrity, had Congress threatening a federal takeover of the state-run insurance regulatory system.

Nothing like that surge of insolvency has happened this time — at least not yet. In fact, according to Weiss Ratings, the number of property/casualty insurer failures dropped from 39 in 2001 to 20 in 2002. The reason? Even though investment income was way off for most insurers last year, indemnifiers raised premiums high enough to assure their survival, says Stephanie Eakins, a Weiss financial analyst.

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