Impaired Company Summary
Information provided to AGRiP in summer of 2005 by Bob Jones of Genesis. All materials obtained from public sources.
Company
/Largest/Most Significant Lines of Insurance
/ When Failure Occurred / Primary Reason(s) for FailureHome / Personal & Commercial Property & Casualty Lines / 2003/1997 / Deficient Loss Reserves
Kemper / Personal & Commercial Property & Casualty Lines
Workers’ compensation / Pending / As of 12/31/2003, risk-based capital had fallen to the “mandatory control level” at which regulators may move in and launch rehabilitation or other proceedings;
Asbestos losses larger than expecte;
Attempts at de-mutualization
Legion Insurance Company
/ Workers' compensationProfessional Liability
General Liability
Accident and health Other miscellaneous coverages / 2003 / Alleged Fraud
Mission Insurance Company / Workers’ compensation / 1987 / Rapid growth
Reliance Insurance Company / Workers' compensation
Commercial Auto
Commercial Liability
Personal Auto / 2001 / Deficient loss reserves / inadequate pricing
Transit Casualty / motor transportation risks / 1985 / Rapid growth
Summary from:
A.M. Best Special Report, September 2003, Excess and Surplus 2003, Section IV, Ratings and Insolvency Trends and Appendix B
Information on Mission and Transit taken from:
http://www.actuaries.org.uk/files/pdf/giro2002/Massey.pdf
Mission Insurance Company
Mission was a California domiciled company that had a good reputation as a writer of
workers’ compensation business. It expanded in the early 1980’s by writing large
volumes of commercial property and casualty business. It wrote both reinsurance and
direct lines. It did so primarily through a couple of Managing General Agents. They
wrote business in Mission’s name and reinsured the bulk of it round the world.
Mission ended up with small net retentions but benefited from commission payments
made by the reinsurer. Mission had about 600 reinsurers; many of them were
unregulated. The MGA’s had limitations as to what they could write but they were
ignored. The MGA took on business at rates lower than those offered by the rest of the
market. The market was at the bottom of the cycle and so was under-pricing risks
anyway.
No IBNR reserves were held for property business. If a policy was greater than 50%
property then it was coded entirely as a property policy. For casualty business a five
year straight declining balance formula was used. To compound the problems the
calculations were performed on the wrong data.
As the claims started to come in, many of the reinsurers had already failed or refused
to pay out. This left Mission with large losses in 1984 and 1985. In 1985 the
California Department of Insurance instigated its triennial examination. It discovered
a large deficiency in the reserves and the company was liquidated in 1987.
The main causes of the failure were the over-reliance on reinsurance, expansion into
new areas, a lack of management control of the (delegated) underwriting and the
under-pricing of risks. The reserves were wholly inadequate, there was plenty of false
reporting and some accounting gimmicks were used.
Transit Casualty
To a large degree the collapse of Transit was very similar to that of Mission. The
difference was that the levels of management incompetence, excessive reinsurance and
reckless expansion through MGAs far exceeded that of Mission. At the time the
receiver termed it the ‘Titanic of insurance company insolvencies’.
Transit was licensed in all fifty states of the USA. Its primary business was providing
cover for motor transportation risks. In 1979 it decided to embark on a program of
expansion into other areas. By using MGAs to write the business and then reinsure
nearly all of it back out, Transit realised the underwriting risk was minimal, yet it
could benefit from being paid a fronting fee. Amazingly the MGAs were given
virtually no guidelines about what they could and could not write and they were hardly
monitored at all.
The Dingell report contains an excellent description of what was really happening:
“Transit gave away its pen and chequebook and said, in effect, ‘go write’. Basically,
the company handed its future and its solvency to a large band of uncontrolled and
uncoordinated salesmen driven by the desire to earn commissions on their sales
volume.”
Some of them were pretty corrupt and channelled the premiums into their own pockets
with no intention to pay the claims.
The number of policies written by Transit went from less than a thousand at the end of
the 70’s to tens of thousands in the early eighties. It could not cope with this rapid
expansion and the financial statements ended up being incomplete, inaccurate and
outdated.
By the end of 1985 Transit was in liquidation but it was really insolvent at least a year
earlier and possibly two or three years earlier.
The main reasons for failure were:
_ Rapid expansion,
_ Delegated management authority,
_ Excessive reliance on reinsurance,
_ Gross incompetence,
_ Expansion into new areas.
The false reporting and fraudulent behavior of some of the MGAs was not so much a
cause of the collapse of Transit, but more a consequence of the gross incompetence of
the management.
Information on Reliance and Legion taken from:
http://www.ins.state.pa.us/ins/cwp/view.asp?a=1285&Q=539675
Reliance Insurance Company
Date of Liquidation: / October 3, 2001States Where Licensed: / All 50 plus the District of Columbia, Puerto Rico, the US Virgin Islands, American Samoa and Guam
Type of Business Sold: / Workers' Compensation, Commercial Auto, Commercial Liability and Personal Auto Coverage
Effected Subsidiaries: / Reliance National Indemnity Company, Reliance National Insurance Company, United Pacific Insurance Company, Reliance Direct Company, Reliance Surety Company, Reliance Universal Insurance Company, United Pacific Insurance Company of New York, and Reliance Insurance Company of Illinois.
The Reliance Insurance Company was founded in Philadelphia in 1817. In 1968, Saul Steinberg purchased the Company through a leveraged buy-out. As recently as 1998, the company appeared to be in excellent financial condition. The Reliance Insurance Company's 1998 annual financial statement, submitted in March of 1999, reflected the highest surplus in the Company's history at an estimated $1.7 billion. However, when Reliance filed its 1999 Annual Statement in March of 2000, its capital level was below standard, as determined using Risk Based Capital (RBC) methodology. The Company's level of capital indicated it was at "Company Action Level," a category requiring increased regulatory monitoring.
Risk factors specific to a company's operations, assets, liabilities, loss reserves and other business risks are used in the Risk Based Capital (RBC) methodology to determine the adequacy of an insurer's capital. RBC is a powerful tool in the regulator's solvency monitoring process and is used to identify companies that may be in a weakening capital position. In the case of Reliance, RBC provided an early warning that increased financial monitoring was warranted.
The Company, after years of writing commercial accounts, was now seeing larger and more frequent claims in certain types of high-risk business, claims that, in turn, required an increase in loss reserve levels. The Company's A. M. Best financial rating was downgraded in June 2000, in part because of the substantial debt of the parent company, Reliance Group Holdings, Inc. This reduction in financial rating resulted in the loss of the Company's brokered commercial business. Additionally, the Company's Unicover pooling arrangement was a failure. All these factors combined with others to sound the death knell for the future financial stability of Reliance.
Due to continued financially hazardous conditions as well as a recently completed first quarter 2001 financial statement that showed a substantially increased negative surplus, Reliance Insurance Company (Reliance) was placed into liquidation by the Commonwealth Court of Pennsylvania on October 3, 2001.
Legion Insurance Company
Date of Liquidation: July 28, 2003
State(s) Where Licensed:All 50 States
Type of Business Sold:Workers' compensation, professional and general liability,
accident and health and other miscellaneous coverages
Legion Insurance Co. (Legion) was ordered liquidated by the Commonwealth Court of Pennsylvania due to its’ financial insolvency.
Legion conducted business often using large deductible policies. Legion held almost no collateral to support the large deductible programs, but was the beneficiary of Deductible Reimbursement policies purchased by insureds from an MRM off-shore affiliate insurance company. As Legion was liquidated, these DR policies were not necessarily honored.
Information on Kemper taken from: www.Hoovers.com/free/co/factsheet.xhtml and
http://www.businessinsurance.com/cgi-bin/search.pl?keyword=kemper%20insurance&limit=10&limit=20&limit=30&limit=40&limit=50&limit=60&limit=70
Kemper Insurance Companies
Date of Liquidation: Ongoing entity
State(s) Where Licensed:All 50 States
Type of Business Sold:Personal & Commercial Property & Casualty Lines,
including workers compensation
Kemper is an ongoing entity, and has not yet, technically, “failed”. It is voluntarily liquidating by running off all of its remaining property & casualty business.
Information on Home taken from:
http://www.hicilclerk.org/DocsDB/2003.nsf/7AD01D1E7AEC12ED85256ED7005D03C6/$file/030503%20verified%20petition%20for%20rehabilitation.pdf?OpenElement and
http://www.blankrome.com/Publications/CorpLit/pdfs/alert0404-2.pdf#search='the%20home%20insurance%20company'
The Home Insurance Company
Date of Liquidation: 2003 (under an order of supervision since 1997)
State(s) where Licensed: All 50 states
Type of Business Sold: Personal & Commercial Property & Casualty Lines,
including workers compensation
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