Loss reserve adequacy may drive ratings, S&P’s says

Given the unprecedented volatility in the financial markets, insurers’ loss reserve adequacy, which had been a matter of secondary consideration in the past few years, may once again drive ratings, Standard & Poor’s said in a recent report.
The article, Insurers’ Reserve Adequacy will Come Under Pressure as Operating Profitability Worsens, states that the U.S. property and casualty industry has experienced a declining pricing scenario in the past couple of years following a period of strong pricing that started in 2002. The monumental financial crisis facing the global financial markets has compounded the situation, it adds.
“In today’s investment environment, [property and casualty] P&C insurers that focus primarily on long-tail businesses, such as workers’ compensation that take many years to settle claims after an insurance event, cannot expect to offset underwriting losses through investment incomes like those during the 1990s,” the report says.
The technology and dot.com bubble generated a stream of strong investment returns for insurers during the previous decade that overshadowed their lacklustre underwriting performances. The prospects are slim for a similarly robust investment performance in the near future, it continued.
“Adding to the current uncertainty is the potential for significant future losses to emerge from directors and officers and errors and omissions claims related to the capital market disruption.”
Over the next few years those claims could total approximately US$10 billion, it adds.