Kenney Rule What it is The Kenney Rule is a guideline for assessing an insurer’s financial strength by comparing its premium-related liabilities to its policyholders’ surplus. Developed by Roger Kenney for property and casualty insurers, it helps regulators and companies judge insolvency risk and capital adequacy. Key idea
* The rule compares unearned premium reserves (or net premiums) to policyholders’ surplus.
* A commonly cited target is 2:1 (uneared premiums to surplus). Some lines—like liability—use a looser target (e.g., 3:1).
* It can be expressed either as:
* Unearned Premiums ÷ Policyholders’ Surplus (target ≈ 2) or
* Policyholders’ Surplus ÷ Unearned Premiums (target ≈ 0.5).
* Higher surplus relative to premium liabilities indicates greater financial strength; a high premium-to-surplus ratio indicates greater insolvency risk.
How to use it (simple calculation)
* Formula (common form): Kenney ratio = Unearned Premiums ÷ Policyholders’ Surplus.
* Example: Unearned premiums = $200 million; surplus = $100 million → ratio = 2.0 (meets the typical Kenney target).
* Interpretations:
* Ratio > target (e.g., >2): insurer may be undercapitalized relative to the premiums it has yet to earn—higher solvency risk.
* Ratio < target: insurer has a larger cushion, but may be underutilizing capital (opportunity cost).
Why it matters
* Gives a quick, comparable measure of an insurer’s buffer against future claims tied to premiums not yet earned.
* Used by underwriters, management and regulators to flag companies that may need more capital or may be taking on too much short-term risk.
Special considerations
* No universal “good” ratio: acceptable levels vary by line of business, risk profile, policy terms and regulatory environment.
* Policies with short or clear coverage periods are easier to assess than those with long-tail exposures.
* A very high surplus-to-premium ratio can signal conservative management or insufficient business growth; a very low ratio can signal excessive leverage and elevated insolvency risk.
* Use the Kenney Rule as one tool among many (reserving adequacy, loss development, reinsurance, capital models) rather than as a sole measure of health.
Bottom line The Kenney Rule offers a simple, long-standing benchmark for comparing premium-related liabilities to surplus. It highlights potential capital shortfalls or excesses, but should be interpreted in context of the insurer’s business mix, risk environment and other financial measures. Explore More Resources