The property/casualty industry experienced rising financial impairment trends in 2011, with impaired companies still emerging well into 2012 and driving figures well-beyond industry averages. 2011's 34 P&C impairments represented a significant jump from the 28 reported for the year by A.M. Best on Jan. 23, 2012.
The 2011 experience was a leap above 2010's 21 impairments and exceeded the P&C historical average impairment count of 25.8. It also stands in stark contrast to the life/health industry's two 2011 financial impairments, the lowest impairment count and rate for the life/health industry in 50 years.
The P&C industry's 2011 financial impairment frequency (FIF)-a more accurate indicator of impairment trends than a mere count-was almost 30 percent above the industry's historical average. This approached the highs of the early 2000s, when the economy also was weak and the stock market dove with the bursting of the dot.com bubble and the effects of the terrorist attacks of Sept. 11, 2001.
Most of 2011's impairments reflect the weak U.S. economy and troubled real estate industry. According to A.M. Best, the impairments also are an indication of the industry's overall deteriorating operating performance. Many of the impaired insurers had been weakening over the past three or four years and were victims of several factors that came to a head in 2011, including soft market conditions, high underwriting losses and poor management decisions. The majority of 2011 impairments appear to have been pushed over the edge by the prolonged effects of the struggling economy. Only three 2011 FICs were the direct result of shock catastrophe losses.
Softening the effects of the weak economy and the high catastrophe losses in 2010 and 2011 on the P&C impairment rate have been the strength of the industry's capitalization and its redundant reserves, and to some extent, its greater attention to risk management. As insurers continue to absorb losses and capital and reserves are drawn down, however, their operating results have suffered and they have become more vulnerable to shock events in the operating environment.
Rating trends are a key indicator of the financial health and stability of the insurance industry because there generally is an accelerating trend in the degradation of ratings before impairments increase. A.M. Best maintains a negative rating outlook on the commercial lines segment. Coincidently, 25 of the 34 FICs, or 73 percent, in 2011 were commercial lines insurers.