Insurers still have “mountains to move”: S&P

In its latest “industry report card” on North American insurance holding companies, rating agency Standard & Poor’s says the more stable outlook on the p&c industry should not be cause for celebration just yet.
“there are a few mountains to move before ratings can turn around, the largest being massive increases in industry reserves for future payouts,” the report notes. It points to the “familiar pattern” of insurers issuing policies too cheaply in prior years, then facing long-tail claims insurers realize reserves are inadequate. And while the strong pricing of the last few years has allowed companies to boost reserves for prior year claims, “there is the real potential for this trend to continue. S&P’s current ratings incorporate estimated [reserve] shortfalls, but if actual shortfalls emerge that are greater than expectations, further rating actions could result.”
Overall, p&c insurers are producing better results in 2004, and the spiral of downgrades witnessed since 2001 has stopped. Even faced with the substantial losses associated with this year’s hurricane season, the rater says industry surplus is strong enough to weather the storms. However, personal property pricing should feel the impact, with the recent softening trend likely to abate.
In the reinsurance sector, U.S. companies continue to drag down the global market as a result of under-reserving, and the rater maintains its negative outlook on the U.S. reinsurance sector. “The expectation is for further downgrades, limited only by the support of number of the players continue to receive from deep-pocketed parents,” S&P notes.
And while results in the U.S. reinsurance sector are expected to be strong for 2005, sings of pricing weakness already creeping into the market, specifically on casualty business, make results for 2006 uncertain.