DEFINITION of 'Kenney Rule'

A ratio of an insurance company’s unearned premiums to its policyholders’ surplus that is said to reduce insolvency risk. The Kenney rule, also known as the Kenney ratio, is a guiding principle used by insurance companies. The ratio varies according to the insurance lines, but is traditionally considered to be a 2-to-1 ratio of net premiums to surplus.

BREAKING DOWN 'Kenney Rule'

The Kenney rule states that, all things being equal, the ratio of policyholders’ surplus to its unearned premium reserve is an indicator of the strength of one insurance company relative to another. The policyholders’ surplus represents the insurer’s net assets, as it is comprised of capital, reserves, and surplus. The unearned premium represents the liability that the insurer still has to account for. Having a higher policyholders’ surplus relative to unearned premium means that the insurer is stronger financially.

The Kenney rule is named after Roger Kenney, an expert in insurance finances who published the book “Fundamentals of Fire and Casualty Insurance Strength” in 1949. While Kenney’s focus was on underwriting property insurance policies, the rule has been adapted to insurers who underwrite other types of policies, including liability insurance.

The type of policy determines what is considered a healthy Kenney rule ratio. Policies that do not provide extended coverage or that do not have an adjusted coverage date are easier to account for, as incidents occurring before or after the policies' effective period are no longer covered.

While insurance companies want to ensure that they have enough of a cushion to cover the potential liabilities associated with the policies that they underwrite, having too high of a ratio of surplus to liability represents an opportunity cost. If the insurer is in a relatively low risk environment and does not underwrite many policies it can have a high ratio, but will also be forgoing future additions to its surplus. This is because it is not taking on new business.

RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Net Liabilities To Policyholders' ...

    The ratio of an insurer’s liabilities, including unpaid claims, ...
  3. Reserves To Policyholders' Surplus ...

    The ratio of an insurer’s reserves set aside for unpaid losses ...
  4. Unearned Premium

    The premium corresponding to the time period remaining on an ...
  5. Insurance Premium

    The amount of money that an individual or business must pay for ...
  6. Losses Incurred

    Benefits paid to policyholders during the current year, plus ...
Related Articles
  1. Financial Advisor

    Mutual Vs. Publically Traded Insurance Companies

    Should you buy your insurance policy from a mutual or publically traded insurance company?
  2. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  3. Insurance

    Dividend-Paying Whole Life Insurance: What to Know

    Many whole life insurance policies pay dividends. Here are what policyholders need to consider.
  4. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  5. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
RELATED FAQS
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  3. Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products. Insurers can deny coverage in many different instances:Non-Renewal ... Read Answer >>
  4. Does unearned revenue affect working capital?

    Learn how an unearned revenue, or deferred revenue, account affects a company's current liabilities and calculation of the ... Read Answer >>
  5. Should I be Worried About My Insurance Company?

    Policyholders should also take a serious look at the financial stability of their current insurance company especially if ... Read Answer >>
Hot Definitions
  1. Time In Force

    Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center