Basic Financial Differences of Substandard Automobile Insurers

Abstract

The substandard automobile insurance companies have produced more than their share of failures and have been something of an embarrassment to the rest of the insurance industry. The causes of the high rate of failure are a source of considerable national concern. The substandard companies fill an need and serve a certain group of insurance buyers who have no other market. The identification of the best of the substandard insurers is of interest to many who deal with them. This paper attempts to set forth basic differences in the readily available financial data of the substandard companies as opposed to the data found in other company groupings. Only Illinois domiciled companies are included in the company samplings to preserve some homogeneity of legislative and regulatory climate. Ratio analysis is used to project the differences. The adequacy of published data appurtenant to substandard companies is also treated. The purpose of this paper is to see if a cursory. examination of the financial statements of various categories of insurance companies with respect to size, and also with respect to the primary class of business written, can be shown to differ widely in various groups of companies. More particularly, do the financial statements of companies specializing in substandard automobile insurance differ widely from other insurance companies, and do these differences, if tlhey are found Campbell K. Evans, Ph.D., C.P.C.U., is Associate Professor of Insurance at Illinois Wesleyan University. Before moving to his present position, Dr. Evans was a member of the faculty at the University of Illinois. The author wishes to acknowledge support of the Risk Theory Seminar from the Cooperative League of the United States of America, including the following companies: Desjardins Mutual Life Insurance Company, Mutual Service Insurance Company, Co-operators Insurance Association, Co-operative Insurance Services, Ltd., La Societe d' Assurance des Caisses Populaires, Nationwide Insurance Company, and League Life Insurance Company. This naner was submitted in April. 1963. to exist, have a bearing on the financial stability of the company? If there are immediately apparent factors which come to light, through an examination of the publicly available data of insurance companies, indicating a probable rate of survival or failure in the market place, then the identification of such landmarks could be of great benefit to those charged with the responsibility of placing insurance for others and to those with regulatory responsibilities. On the other hand, if the readily available financial data do not reveal clues as to the future financial health of the particular company, then those faced with company selection and company supervision have a somewhat more difficult task. They must look beyond the commonplace data into filings and into the background data and insider data which may be available only to regulatory authorities.