Best’s Commentary: Impairments of AM Best-Rated Insurers Have Declined Since 2001

A new AM Best study shows that impairments among rated insurers have declined since 2001, as compared with the 24-year period preceding it to 1977.

In its Best’s Commentary, titled, “Impairments of AM Best-Rated Insurers Have Declined Since 2001,” AM Best analyzed impairments in two time periods: 1977-2001 and 2001-2023. Beginning the analysis in 1977 correlates to the annual Best’s Impairment Rate and Rating Transition Study, and 2001 was selected as the cut-off year due to the simultaneous upheaval in insurance markets following Sept. 11, conditions in the casualty markets at the time and the immediate aftermath of the dotcom bubble. The term impairments refers to insurers that became impaired and had a Best’s Financial Strength Rating (FSR) or Long-Term Issuer Credit Rating at the time of impairment. AM Best designates an insurer as a financially impaired company upon the public placement of the company, via public court order or other international equivalent, into conservation, rehabilitation and/or insolvent liquidation.

According to the commentary, the impairment rate over any 15-year span beginning in the 2001-2023 period on average was 0.3% for the population of insurers rated most highly by AM Best, at a FSR of A or above, compared with a 15-year impairment rate of 3.9% for the 1977-2001 period. On a 10-year basis, these percentages improve to 0.2% and 2.6%, respectively. Numerous reasons can be attributed to the improvement in impairment rates from 2001 on, including federal regulations, National Association of Insurance Commissioners (NAIC) guidelines and enhanced AM Best rating methodologies and analytical processes. Notably, in recent years, several companies have become impaired due to natural catastrophes, though these companies were not rated by AM Best.

AM Best continues to refine its rating process to ensure that our analytical processes capture insurance industry market trends, the macroeconomic environment and regulatory developments. In more-recent years, innovation was codified in the business profile building block of AM Best’s core methodology. With innovation, companies can develop sustainable competitive advantages and better respond to external challenges such as evolving consumer preferences, growing business complexity, shifting market dynamics and ever-expanding technological advancements. AM Best also designed and implemented a pandemic stress test in light of the global COVID-19 pandemic.

To access a copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=347699.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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