Insurance companies employ the Kenney rule, also known as the Kenney ratio, to advise them in the case of a claim. The rule is also used to keep Insurers from going bankrupt. According to the regulation, Insurers should avoid writing premiums that are equal to or more than two or more times their surplus and capital. As a result, the suggested ratio is 2 to 1.
It was published in 1949 in Roger Kenney's book, "Fundamentals of Fire and Casualty Insurance Strength," in which he detailed his research and development of the Kenney rule.
Insurance firms typically use the Kenney rule as a directive metric, which is why it is named as such. Even though the ratio varies based on the insurance classes, it is most often used in the casualty and property portions of the industry.
In Kenney rule, the defined or chosen ratio reflects the relationship between a policyholder's surplus and unearned dividend reserve. In this case, the unearned premiums represented the possibility of unexplained liabilities.
Kenney rule does not have a one size-fits-all policy as that would vary immensely upon the situation and individuals’ circumstances. Many factors are to be considered, such as the events that lead up to the policy tenure, amount of assets in possession, liability, and others. Events that took place after the policy period are not covered.
Insurance providers must have sufficient capital when dealing with each individual and consider the additional liability concerns that the individual might have.
If the insurer is operating in a low-risk environment and does not underwrite a large number of policies, it may have a high ratio and be foregoing future increases to its surplus in order to maintain that ratio. This is due to the fact that it is not accepting new business.
To achieve the best possible balance between the two, an insurer should attempt to create a ratio that generates new business and maintains operational growth while also building up a large enough cushion to defend them against any claims. It should be noted that the actual percentage changes based on the kind of insurance being considered.