Insurer exposure to reinsurance credit risk varies widely: study

A study of top commercial insurance writers in the U.K. illustrates the wide variance in exposure to reinsurance credit quality and other financial strength indicators. The study “Insurer Financial Strength Examined” looks at key indicators commercial clients need to assess as they grow increasingly concerned about insurer strength, says author Deborah Pretty, principal of Oxford Metrica.
Specifically she addresses reinsurance exposure, asset allocation and underwriting performance. When it comes to reinsurance, while the top ten performers, as a group, have lowered their exposure to reinsurance markets in the past year, disparity remains. Overall, of the US$253 billion in general insurance premiums written by the group in 2003, US$200 billion was retained (79%). In 2002, insurers retained US$167 billion of the US$217 billion in premiums written (77%).
While AXA, Chubb and Allianz each ceded less than 15% of their net written premiums in 2003, Royal & SunAlliance and ACE each ceded more than 30%. This kind of variance is also seen in data on the ratio of reinsurance recoverables to tangible equity, which serves as an indication of exposure to deteriorating credit quality in reinsurance markets, explains Pretty. Chubb and AIG both posted ratios well under the 50% mark, while ACE was well over 200%. Overall, however, the industry did lower its exposure to reinsurance credit risk to 115% in 2003 from 161% the year prior.
On the issue of asset allocation, Pretty notes that less strict regulations have allowed European insurers to hold higher levels of equity exposure than their U.S. and Bermudian counterparts. In 2003, European insurers held 16% of their portfolios in equities, versus 3% in the U.S. and Bermuda.
And overall in the realm of underwriting performance, insurers are posting improved results, with the U.K.’s top ten hitting a 99% combined ratio last year versus 104% in 2002. And while four of the top ten were not able to bring in ratios below 100%, none was above 120% in 2003.