Surety insurers in crisis, says S&P

A new report from Standard & Poor’s suggests that the settlement of a recent Enron lawsuit against surety insurers in the U.S. highlights problems within that line of business. Specifically, S&P says the settlement shows how “ill-prepared” some insurers are to handle surety claims.
“This is an example of underwriters not fully understanding the consequences of what they are doing,” comments Bob Partridge, a managing director in S&P’s insurance ratings.
The lawsuit resulted in J.P Morgan Chase & Co. receiving about 60% of a total US$1 billion claim against Enron surety policies. Insurers had argued that they had unknowingly been insuring a loan, a case largely rejected in the settlement.
The report says that the case illustrates the dangers of multi-line companies trying to write coverage best handled by mono-line surety provider. As well, S&P questions the practice of taking on “credit enhancement” business under the mantle of traditional surety business, which tends to be much less risky. Credit enhancement and surety are “entirely different businesses with entirely different capital and liquidity requirements,” says Mark Puccia, also a managing director with S&P’s insurance ratings.
S&P has a specific rating, the financial enhancement rating (FER) to assess the willingness of mono-line companies to pay claims on credit enhancement policies, regardless of potential fraud in the insured transaction. It assesses the willingness to pay now and ask questions later. This differs from their financial strength rating, which comments only on the ability to pay traditional claims. This same distinction applies to reinsurance ratings, S&P adds, noting that it is uncertain if the 11 insurers involved in the Enron suit will be reimbursed in the reinsurance market.