Canadian Underwriter

P&C business dragging reinsurance ratings

October 24, 2003   by Canadian Underwriter

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Underperformance in the property & casualty line that is hampering reinsurer ratings, along with pressure on risk-adjusted capital, says rating agency A.M. Best. And the outlook for 2003 yearend is for little improvement, the firm adds.
Given the current low interest rate situation, reinsurers have to rely on underwriting profit, which has been modest at best in the p&c line. Despite strong pricing, combined ratios have been in the mid-90% range or higher for the first half of the year, even in light of few catastrophes and little recognition of adverse development during that period. The net result is a drag on future capital adequacy, A.M. Best notes.
Although reinsurers say this is merely a lag of pricing increases showing up in results, the rater says the degree of result improvement is actually slowing, and the potential for future rate increases on top of those already seen, are slim. “Accordingly, unless the market’s traditional cyclicality has been eradicated, it is difficult to see how healthy returns will be maintained when the market turns,” a press release notes.
However, the Bermuda market is showing strong returns, although earnings may be more volatile in this market segment.
Overall, A.M. Best says there are already signs of price-based competition returning to the market, and the necessary price discipline to support risk-adjusted capital and future potential adverse development is not likely to be maintained.
“A.M. Best believes it is unlikely that underwriting returns sufficient to support the capital necessary for the very higher ratings will be a feature of the next few years for most market participants.” Financial strength ratings are not likely to return to former levels except in some specific cases due to capital raising initiatives. And, the rater adds, many companies are choosing to “live with lower ratings”, as they seek to maximize return on risk-adjusted capital.

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