KBRA Releases Research Note on State Takeover of Failing Insurer
NEW YORK--(BUSINESS WIRE)--Dec 4, 2018--Kroll Bond Rating Agency (KBRA) releases a research note entitled California Wildfire Losses Lead to State Takeover of Failing Insurer.
On November 30, 2018, the California Department of Insurance posted a news release that stated it took control of Merced Property and Casualty Company (Merced). As noted in the release, California’s insurance regulator took expedited legal action today to secure the assets of and take control of Merced, in an effort to protect the company’s policyholders, including those who suffered losses in the Camp Fire. Sadly, policyholders who lost their homes and loved ones must now deal with a claims process that likely will be more challenging.
The state’s action enables the California Insurance Guarantee Association (CIGA) to immediately begin the process of evaluating losses and paying claims. However, it remains unclear how quickly claims can be settled for Merced, which will be handled through CIGA. In addition, CIGA has limitations and other eligibility requirements, including certain limitations on the amount of coverage available or the types of policyholders or claims covered.
KBRA notes that the insurer had policyholders’ surplus of nearly $17 million at year-end 2017 and as of June 30, 2018. Although policy details and Merced’s reinsurance program are unavailable, there are indications of a geographic concentration and inadequate reinsurance.
For this reason, KBRA believes a thorough financial analysis of an insurer, without reliance solely or predominantly on a capital model, is needed to evaluate an insurers’ financial strength. A thorough financial analysis includes, among many other things, an evaluation of an insurer’s geographic concentrations and reinsurance programs, which should be stress tested and include scenario testing.
Based on the average home values in the Camp Fire region, it would take about 30 total residential losses to approach Merced’s $17 million in surplus. As of December 3, 2018, the Camp Fire destroyed close to 14,000 residences. This emphasizes the critical importance of having a comprehensive reinsurance program in place, especially for insurers that lack geographic diversification.
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
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Fred DeLeon, Director
firstname.lastname@example.orgAndrew Edelsberg, Managing Director
email@example.comDonna Halverstadt, Managing Director
KEYWORD: UNITED STATES NORTH AMERICA CALIFORNIA NEW YORK
INDUSTRY KEYWORD: PROFESSIONAL SERVICES INSURANCE
SOURCE: Kroll Bond Rating Agency
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PUB: 12/04/2018 06:09 PM/DISC: 12/04/2018 06:09 PM