Unveiling the Mystery of Policyholder Surplus: Why It Matters More Than You Think

Understanding Policyholder Surplus

Policyholder surplus in the property/casualty insurance industry stands at nearly $800 billion, a figure that often raises eyebrows. However, this surplus is not a 'rainy day fund' but an essential part of the industry's ability to fulfill its promises to policyholders. Regulated on a state-by-state basis, insurers must hold reserves based on their risk profile, accounting for about half of the industry surplus.

The Impact of Regulatory and Rating Agency Requirements

In addition to state regulators' requirements, private rating agencies like A.M. Best, Fitch, S&P, and Moody's demand even higher reserves to maintain strong ratings. These ratings are crucial for consumers and businesses when choosing insurers and can influence borrowing costs, affecting policyholders' premiums. Consequently, the initial $800 billion surplus reduces to about $200 billion, the amount available to cover claims without regulatory and rating agency actions.

Current Challenges and Future Implications

The first quarter of 2020 saw the industry's largest-ever quarterly decline in surplus, largely due to stock value declines related to the COVID-19 pandemic. Despite this, the industry remains financially strong, thanks to investment-grade bonds. However, extraordinary events like hurricanes, wildfires, and civil unrest have not yet fully impacted surplus. For instance, Hurricane Laura's losses are estimated between $4 billion and $13 billion, and California's 2020 wildfires have already burned more acres than any previous year. These events, combined with routine claims, highlight the critical role of policyholder surplus.

In conclusion, while policyholder surplus may seem substantial, its actual availability is significantly less due to regulatory and rating agency requirements. The ongoing challenges from natural disasters and the pandemic further underscore its importance. For readers, understanding these dynamics can help in making informed decisions about insurance coverage and financial planning.