Market Improves but p&c rating downgrades prevail (November 21, 2005)

The past year has resulted in the financial strengthening of the property & casualty insurance market however A.M. Best Co. recently released a report warning that it will take several more profitable years for the full balance sheet to be truly replenished after the softening of the market as the industry is still overcoming a substantial $59 billion loss-reserve deficiency.
A.M. Best also voiced continued concern over the quality of capital due to the fact that “substantial reinsurance recoverables, terms and quality of reinsurance and inadequate loss reserves could have a negative impact on capital.” This is a result of an unequally distributed wealth of surplus gains.
While many insurers have benefited from the favorable pricing cycle, A.M. Best says others have found it difficult to reverse several years of inadequate pricing that led to poor underwriting returns.
In addition, rating downgrades outpaced rating upgrades over the 12-month period ended July 12, 2005, for the fifth consecutive year however the effects of catastrophes in the latter half of 2005 are not factored into the analysis.
A.M. Best says the basis for the majority of rating downgrades is the adverse development of prior accident year loss reserves, especially for commercial-lines carriers that are exposed to longer-tail liability lines such as workers’ compensation, general and products liability, medical malpractice, directors and officers, and surety.