Kenney Rule: Definition, Rules & History

KEY TAKEAWAYS

• According to the Kenney Rule, an insurer should aim for a two-to-one ratio between unpaid premiums and policyholder surplus.
• According to the Kenny Rule, an insurance company’s strength can be gauged from its policyholder surplus to its reserve for unearned premiums.
• A solid financial position for an insurer is indicated by a bigger policyholder surplus in comparison to unearned premiums. 

What Is the Kenney Rule?

The Kenny Rule refers to a desired ratio of two-to-one. This is between the surplus of an insurer’s policyholders and the number of unearned premiums. It was created by Roger Kenney and aids in assessing and lowering the likelihood of an insurance firm going bankrupt. 

Companies that write property and casualty insurance frequently apply this guideline. The Kenney rule allows regulators to assess an insurer’s ability to settle claims. As well as their ability to maintain financial stability.

What Is the History of the Kenney Rule?

The Fundamentals of Fire and Casualty Insurance Strength was a book published in 1949. It was written by insurance financial specialist Roger Kenney and it is where he first came up with the Kenney Rule. 

The rule has been modified to apply to insurers who underwrite other types of policies. This includes liability insurance. Even though Kenney’s concentration was on the underwriting of property insurance policies.

How Does the Kenney Rule Work?

The Kenney rule works by arguing that an indicator of an insurance corporation’s strength in comparison to another is the ratio of its policyholder surplus to its unearned premium reserve. The net assets of the insurer, which are made up of capital, reserves, and surplus, are represented by the policyholders’ surplus.

The responsibility for which the insurer is still liable is represented by the unearned premium. A stronger financial position for the insurer might be inferred from a bigger policyholder surplus. This is when compared to an unearned premium. The contrary is implied by a higher surplus of policyholders to unpaid premiums—that the company is financially insecure.

A surplus-to-liability ratio that is noticeably high could suggest that the insurance corporation may face opportunity costs. This is a result of keeping a sizable quantity of cash in reserves rather than using it to expand the business.

What Are the Policies of the Kenney Rule?

There is no universally accepted definition of what constitutes a good or acceptable Kenney rule ratio. The definition of a healthy Kenney rule ratio depends on the type of policy. Because incidents occurring before or after the policies’ effective period are not covered, policies without extended coverage or those without a revised coverage date are simpler to account for.

Summary

In order to pay any obligations related to the policies they underwrite, insurance companies want to make sure they have a big enough cushion. This is where the Kenney rule can help these companies.

A high Kenney ratio, however, is not necessarily a good thing. This is due to the potential cost that a very high surplus to liability ratio represents—the advantages that the business may lose out on by having too much cash on hand in its reserves.