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.