Determining the Causes of Impairment

When companies don’t set aside suffi cient reserves, pursue growth at the expense of fi nancial strength or price business too low, trouble can follow.

More than 50% of impairments have been from inadequate reserves, under-pricing and too-rapid growth. These causes are related.

Carole Ann King, A.M. Best Company

Typical of most years, more than half of impairments in 2009 originated from three causes:

• Inadequate reserves; • Underpriced business; and • Too-rapid growth.

Carole Ann King, who helped edit A.M. Best’s annual report on impairment and insolvencies, cites the example of Lincoln General, a commercial auto writer serving the trucking industry. Despite moves by its parent to strengthen the company, the impact of a slower economy and continued weakening prompted regulators to step in during 2009.

Economic conditions are a factor in impairment activity, but usually serve as the fi nal straw for companies that are already experiencing fi nancial stress. Those companies may have inadequate reserves, or at least are unable to tap their assets because they are not suffi ciently liquid.

Sectors in the property/casualty sector most frequently involved in impairment in 2009 include:

• Homeowners;• Workers’ compensation; and

• Commercial liability.

Sectors in the life/health sector most frequently involved in impairments in 2009 include:

• Accident and health; and • Group coverages.

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