Why Insurance Insolvency is Becoming a Problem
Insurance insolvency is when an insurance carrier experiences a reduction of assets resulting in financial distress. As a result, they cannot pay bills, pay down debts, or meet other financial obligations. Insolvency can lead to bankruptcy if the company is not able to pay off their creditors. In financial terms, insolvency can be defined simply as when liabilities exceed assets.
Insolvency can result from a multitude of factors, such as a reliance on debt as a form of funding, poor accounting, excessive lawsuits, increased production costs, and loss of sales.
Recently, many insurance companies have become insolvent for a new reason: climate change.
Changing weather patterns have produced more frequent, extreme, and unseasonal weather events. Storms with heavier precipitation and stronger winds, fires, floods, and droughts have caused a huge uptick in insurance claims. Insolvency can sometimes even bankrupt an insured company’s holding, or parent, company.
Not surprisingly, coastal areas have been heavily impacted. In Florida, insurance insolvency has become a crisis, where 15 insurance carriers have become insolvent since 2020.
Hurricane Andrew, which hit the sunshine state in 1992, caused over a dozen insurers to shutter their doors. Hurricanes Irma and Michael in 2017 and 2018 caused approximately $30 billion in claims, further cutting into insurance company reserves and other assets.
But insurance company insolvency is not only an east or south east coast phenomenon, as evidenced by wildfire claims in the west coast, including California’s deadly 2018 Camp Fire that caused the insolvency and liquidation of Merced Property and Casualty Company.
Lack of reinsurance has also contributed to insolvency. Reinsurance is sort of a way for insurance companies to insure themselves, and they usually do this by partnering with multiple other carriers to purchase policies, often through one umbrella reinsurance company. This allows each individual company to spread risk by sharing the financial burden in the case of total loss and disaster claims. In turn, this sharing of risk helps allow companies to remain solvent if these disasters should occur.
But reinsurance is getting harder for companies to acquire in hard-hit weather areas like Florida and Louisiana, contributing to the insolvency crisis. It’s also starting to become a problem in other states prone to coastal storms and flooding, such as New Jersey and other eastern states.
Inevitably, the problem gets passed down to the policyholders who must incur higher rates.
As the market becomes smaller with less companies to cover the growing demand of those seeking coverage, economics dictates that rates will increase. And with the potential for larger and more catastrophic events, companies are forced to charge more to guard themselves against potential future losses.
If you have questions or concerns about insurance insolvency, contact your agent. They will be able to address any concerns, review your policy, and advise you on the current financial status of your insurance carriers.
By Colleen Woods-Esposito
