Solvency Levels and Risk Loadings Appropriate for Fully Guaranteed Property-Liability Insurance Contracts: A Financial View

In the past, the determination of appropriate solvency levels for U.S. companies writing major property-liability insurance lines took a decidedly non-analytic approach. Verbal persuasion, reinforced by continual empirical observation, allowed for the dominance of the so-called Kenney Rules for the determination of an appropriate level of financial assets, relative to premiums written, as the required solvency level. For example, it would be assumed for regulatory purposes that if the ratio of assets to written premiums were normally 3/2 then policyholders could be assured of the payments of all their contractual claims.1