NEW YORK -- A vast statistical study by the rating agency Standard & Poor's concludes that the ability of hundreds of small insurers to pay policyholders is suspect.
The study, two years in the making, suggests that $18 billion in policies have been issued by insurers with only limited security. The data were derived from reports filed with the National Association of Insurance Commissioners for 1989.
A second edition using 1990 data is to be released this summer. Standard & Poor's executives believe it will paint an even bleaker picture, with many more companies registering numbers suggesting a dubious ability to pay off claims.
Insurance company solvency, once the dull backwater of a industry, has recently exploded into the headlines.
Major losses have been reported at Baltimore-based USF&G Corp. (judged to have "adequate" security, vulnerable to adverse economic or underwriting conditions) and many other major insurers. Last week, the core California operations of the massive First Executive Corp. (rated highly vulnerable) were seized by state regulators, prompting widespread concern for the safety of thousands of pensions and associated benefits.
Some 95 percent of the policies issued by companies reviewed by Standard & Poor's have at least adequate security, according to Roy Taub, the company's executive vice president who headed up the study.
But the remaining 5 percent, issued by 489 of the 2,050 companies reviewed, are of concern. Moreover, Mr. Taub said, hundreds of other companies were not reviewed because of deficient filings. Since their filings were not complete, he said, there is reason to suspect that they are more likely to have problems.
Traditionally, Standard & Poor's produces detailed analysis of 450 of the largest companies, responsible for about two-thirds of all coverage. These evaluations are paid for by the companies themselves and include analysis of public and non-public information and interviews with company executives.
Under this structure, most of the smaller companies were not reviewed. The new Standard & Poor's study uses a broad-based statistical model derived from its traditional analysis to screen public filings of an additional 1,600 companies. Because interviews and non-public information is not included, the results are not considered as definitive; Standard and Poor's calls them "qualified" rankings.
The results are being published in two volumes, one covering life insurers and the other property-casualty. The volumes will be sold to the public for $75 apiece.
The conclusions, Mr. Taub said, are intended to provide a "first cut" for insurance purchasers.
"In the past, consumers looked at price, and insurance companies have increasingly been encouraging them to look at service, but we think a third component is safety," Mr. Taub said. "They should ask their agent what the company issuing a policy is rated."
Generally, smaller companies received poorer ratings than larger ones, but there were many exceptions. Initial analysis suggested no difference in the quality of insurers in different regions of the country.
In a test of the study's relevance, Mr. Taub said that of the 11 insurers to become insolvent this year, three had received poor grades and another eight had not filed enough information to qualify for a ranking.
"We think it's a reasonably good predictor," he concluded.
Standard & Poor's admits, however, that its screening is far from perfect. First Executive, for instance, went through Standard & Poor's most rigorous examination and as recently as January of last year was still ranked in the top tier of companies.
Mr. Taub said, "We won't catch everything."