A.M. Best Special Report: A&H Financial Impairments Led Field of Six in 2010

Four accident and health (A&H) insurers that experienced large operating losses in 2009, as well as two life companies, became impaired in 2010. All six financial impairments resulted from the combined cause of deficient loss reserves/inadequate pricing. This contrasts with 2009, when at least half of the 13 impairments were due to investment losses related to the financial crisis.

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The overall improvement in impairment frequency from 2009 to 2010 is partially due to the improving economy and financial markets and to the life insurance industry’s strong capital and surplus. A&H impairments diminished only slightly in 2010. A&H insurers’ liabilities and assets are more short term and more volatile than those of life and annuity insurers. In fact, they operate in a manner more similar to commercial property/casualty (P/C) insurers, which dominated P/C impairments in 2010 (see U.S. Property/Casualty – 1969-2010 Impairment Review, published April 2, 2011).

As A&H insurers absorbed the impact of the recession, their earnings continued to suffer and their reserve funding requirements increased, thereby helping to push up the number of financially impaired companies (FIC) for 2010. The A&H industry’s Financial Impairment Frequency (FIF) historically also has been considerably higher than the life and annuity segments’ FIF.

Two life/health impairments also were added to A.M. Best Co.’s historical database of impaired companies, bringing the total for the 32-year study to 639. Lags in reporting FIC occurred because state regulators are increasingly reluctant to publicly disclose troubled companies that they are attempting to rehabilitate or sell.

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