March 14, 2010

How Frequently Do Insurance Companies Fail?

One of the risks of dealing with an insurance company is that the company might fail.   If you buy an annuity or some other form of investment from an insurance company like cash value life insurance then there is a small chance the insurance company might go bankrupt.   If an insurance company does fail then state guarantee associations guarantee your investment up to a maximum amount.   I don't think the risk of insurance company failure is high, but it does exist.   Even companies that appear solid aren't immune to risk of failure.  AIG had an A+ 'superior' rating in 2008 not long before the government had to step in and bail them out. 

Given that insurance companies can fail we know there is risk.  So how much is the risk of insurance company failure?  I did a bit of web research on this to try and answer that question.   I didn't find a definitive source with historical data on insurer failure rates.   I did find a number of different sources with bits of data that I think gives a decent rough estimate on the failure rate for insurance companies.

The National Organization of Life and Health Insurance Guarantee Associations has a partial list of Life / Health (LH) insurance companies that have been "impaired" or gone insolvent.   I count over 60 companies on that list and the list covers from 1983 to today.   But thats just a partial list so more then that have failed.   But if over 60 companies failed in 27 years then thats an average of over 2 failures / year.    About 11 of the companies on that list were just "impaired" which means that they remained in business but were taken over.

An old article citing a study from A.M. Best said they had found that "Overall, life/health insurer impairments remained relatively rare for the 27-years of the study, ranging from about 1-in-250 companies in the more stable times to 1-in-35 companies during more difficult ones. The annual average of impairments was 1-in-109 companies over the entire study period."

The III says that there are "There were 2,741 P/C insurance companies and 1,128 L/H insurance companies in the United States in 2008."   Another source cites some failure  #'s from 2004 and it says: "Overall, last year saw 22 insurer insolvencies, compared to 28 in 2002. Four life and health insurers and 18 property and casualty insurers failed in 2003, compared to three and 25 respective failures in 2002."  Those two sources above gives me #'s of failures in 2003 and 2002 and total insurers in 2008.   Of course 2002-2003 and 2008 are different years but the # of insurers is not likely to have changed significantly in a few year period.  So I can roughly estimate failure % rates using the failures form earlier years / total insurers in '08.   In 2003 there were 4 insolvencies of L/H companies and in 2008 there were 1128 such insurers.   That is about 0.3% failure rate.   They cited 18 P/C failures in 2003 and there are 2,741 of those in 2008.  That is a 0.6% failure rate.    For 2002 the failure rates are pretty close at 3 for L/H and 25 for P/C or roughly 0.2% and 0.9% failure rate.    

Bottom line, my estimate from these sources is that the rough annual failure rate for insurance companies is 0.2% to 0.9%.   Thats 1 in 111 to 1 in 500 level.

8 comments:

  1. How many companies have failed since the financial collapse of 2008?

    Now how many banks have failed?
    http://www.fdic.gov/bank/individual/failed/banklist.html

    Why? something called fractional banking. Why so little life insurance companies? They are required by law to have very very very conservative investment....nothing but the best for a mandatory 80% of their portfolio. Also, there are the reserves, NO fractional banking/accounting for them.

    No offense, but it seems like you have a huge bias, for whatever reason, that has impeded the objective due diligence a topic like this deserves.

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  2. you mean you didn't get the answer you hoped for. Dummy insurance companies are super conservative, they rarely fail

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  3. I said "I don't think the risk of insurance company failure is high, but it does exist." And the data shows that the risk is not high but it does exist.

    If you think that me stating that insurance companies risk of failure isn't high and then showing its less than 1% rate is a 'huge bias' then I don't know what you think that bias is about.

    There is always a risk that ANY financial institution could fail. The risk that an insurance company will fail is very low as shown by the data.


    Jim

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  4. The real question is not if the insurance company will fail, but if the policy you buy will not be honored. Usually when insurance company fails, policies are transfered to another company. Actual liquidations are rare and even then insurance companies are well capitalized and any shortfall up to some limit is covered by state fund.

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  5. This comment has been removed by the author.

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  6. Most of your article is INCORRECT. Life insurance companies do not go bankrupt. They go into receivership and their assets are taken over by the commissioner of insurance and their obligations are disbursed among healthy companies, so that no legal reserve life insurance company has ever paid back less than their contractual obligations since 1918. Also AIG and its life insurance company are seperate entities, and there was NEVER a risk that the annuities or life policies were at risk due to CDO or swaps during the mortgage crisis. You have no authority or knowledge of the industry for which you presume to write about in this posting. Thank you for perpetuating more misinformation about the L&H industry.

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  7. Well OK then! Thanks Anonymous random stranger on the internet for setting us all straight!!

    Jim

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  8. Receivership
    : http://www.investopedia.com/terms/r/receivership.asp
    "A type of corporate bankruptcy in which a receiver is appointed by bankruptcy courts or creditors to run the company."

    Maybe its not technically correct to say insurance companies go 'bankrupt' but for all purposes an insolvent company in receivership is basically the same thing. Its belly up, caput and dead.

    Jim

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