Solvency Preserving Loss Ratio

There are no magic formulas for solvency protection. I require all insurers to meet a uniform solvency protection standard, the ``Solvency Preserving Loss Ratio'' ($SPLR_N$). $SPLR_N$ is the highest level PLRE insurers must be able to cover, before issuing policies, and it protects each insurer from PLREs up to PLR + 3 * $\sigma_{e_{I}}$, or all the Claims Costs it incurs with probability 0.9987. Insurers with adequate Surplus face insolvency less than 14 out of 10,000 years.

Table 1 Row 8, shows insurers' Solvency Preserving Loss Ratios. $SPLR_{PI}$ = 0.9000, but larger insurers, with lower standard errors, have lower SPLRs: $SPLR_{NHI} = 0.75855$ and $SPLR_{B} = 0.79743$, while smaller insurers, with higher standard errors, have much higher SPLRs: $SPLR_{D} = 1.22434$ and $SPLR_{E} = 2.25000$. To be as well prepared as $PI$, to cover unusually high Claims Costs, $D$ and $E$ will need to idle huge amounts of Surplus, before issuing any policies. My risk adjusted Surplus requirement inhibits market entry by small, inefficient insurers, that are likely to fail, and encourages market entry by large, efficient insurers that are likely to succeed.

Regulators encourage other insurers to cover failed insurer's policies to maintain consumer confidence. $NHI$ and $B$, with profits over 9%, and 5%, can cover many failed insurers' policies and earn good will. But small, inefficient insurers decrease the efficiency of insurance markets, taking excessive profits, or shifting their losses, to other insurers.