What Is the Kenney Rule?

Kenney rule refers to a ratio that sets a target of unearned premiums to an insurer's 澳洲幸运5开奖号码历史查询:policyholders’ surplus of 2-to-1. Developed by Roger Kenney, it helps determi🏅ne and reduce the risk of an insurance company's insolvency. The rule is commonly used by companies that write property and casualty insurance. Regulators can use the Kenney rule to an insurer's ability to pay out claims and remain solvent.

Understanding the Kenney Rule

The Kenney rule is named after Roger Kenney, an expert in insurance finances who published the book Fundamentals of Fire and Casualty Insurance Strength in 1949. While Kenney’s focus was on 澳洲幸运5开奖号码历史查询:underwriting property insurance policies, the rule has been adapted to insurers who underwrite other types of policies, including 澳洲幸运5开奖号码历史查询:liability insurance.

This rule, also called the Kenney ratio, is a guiding principle used by insurance companies. The ratio varies according to the insurance lines and is still commonly used in the property and casualty segment of the industry. The common ratio is traditionally considered to be 2-to-1 of 澳洲幸运5开奖号码历史查询:net premiums to surplus. Specific segments, such as lia🃏bility insurance, use a slightly different ratio—3-to-1.

But what✱ does this all mean? The K❀enney rule states that the ratio of policyholders’ surplus to its unearned premium reserve is an indicator of the strength of one insurance company relative to another. The policyholders’ surplus represents the insurer’s net assets, comprised of capital, reserves, and surplus.

The unearned premium represents the liability that is still unaccounted for by the insurer. Having a higher policyholders’ surplus relative to unearned premium means that the insurer is m🐻ore robust financially. A lower policyholders’ surplus to unearned premiums implies the opposite—that the company is financially unstable.

Special Considerations

There is no one-size-fits-all standard for a Kenney rule ratio that is considered good or acceptable. The type of policy determines what is regarded as a healthy Kenney rule ratio. Policies that do not provide extended coverage or those that don't have an adjusted coverage date are easier to account for because incidents occurring before or after the policies' effective period are no longer covered.

Insurance companies want to make sure they have enough of a cushion to cover any liabilities associated with the policies they underwrite. But that doesn't mean a high Kenney ratio is always a good idea. That's because a very high surplus to liability ratio represents an opportunity cost—the benefits that the company may miss out on by having too much caܫsh on hand in its reserves. Here's why.

If the insurer is in a relatively澳洲幸运5开奖号码历史查询: low-risk environment and does not underwrite many policies, it 🧜can have a high ratio and be forgoing future additions to its surplus. This is because it is not taking on new business.

Ideally, an insurer should strive to achieve a ratio that strikes the perfect balance between the two, generating business and maintaining operational grꦇowth while still accumulating a sufficient cushion to protect them against potential claims. Again, the exact ratio varies depending on the type of policy involved.