North American insurers stable; reinsurers face challenges

While the outlook for North American insurance holding companies remains stable, their counterparts in the reinsurance sector can expect downgrades to outweigh upgrades in the near future, says rating agency Standard & Poor’s.
Despite continued rate increases, S&P has extended its negative outlook on the reinsurance sector for the sixth consecutive year on the back of reduced financial flexibility and prior-year liabilities. Many reinsurers continue to suffer from reduced quality of capital, and also low ability to source capital to meet requirements. Reinsurance recoverables remain an issue, as does adverse development on long-tail business.
At the same time, reinsurers have not capitalized on the nard market to the degree which might have been expected. “Although participants need to rebuild and restructure their capital bases and put in place foundations to reduce future loss volatility, the ease of entry for new players and increased competition in the market have dampened the ability of existing players to recover,” S&P notes.
The picture for primary insurance holding companies is brighter, with improved results in the U.S. personal lines sector expected to continue. While pricing increases will moderate, the homeowners line should see strong pricing sustained in the face of rising construction costs and natural disaster costs.
The commercial lines segment has seen improved pricing, but no end in sight to reserve issues on prior-year business. Nonetheless, S&P expects pricing to continue to outpace claims growth through 2004, with the impact seen in 2005 results.
Commercial lines writers must heed reserving issues, S&P warns, as even with improved results, rating agencies will be monitoring reserve adequacy.