Report on Calculation and Validation of Insurer Impairment Rates for Demotech, Inc.

This report summarizes the analysis performed for Demotech, Inc. (DT) to provide independent verification of its impairment and survival rate calculations of insurance companies for which it issues Preliminary Financial Stability Ratings® (PFSRs) and Financial Stability Ratings® (FSRs). The efforts included validating the data used to perform the calculations as well as independent calculation of impairment and survival rates based on the validated data. There were more than 48,000 PFSRs and FSRs assigned by DT to more than 3,650 insurers over the period 1989 through 2016. There were 363 identified impairments associated with these PFSRs and FSRs. Periodically, DT publishes reports to provide a retrospective analysis of the efficacy of its FSRs and PFSRs to distinguish between financially stable and less than financially stable insurance companies. Demotech has prepared three such reports previously. The authors prepared this report. To our knowledge, no other insurer rating agency has secured an independently verified report on its impairment or survival rates of companies for which they provided ratings. Hence, we believe that this analysis of Preliminary Financial Stability Ratings® (PFSRs) and Financial Stability Ratings® (FSRs) is unique and unprecedented research.

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