U.S. commercial lines challenged by pricing peak, Spitzer probe: S&P

With commercial p&c rates having peaked already, and the industry facing myriad regulatory and legal challenges as a result of investigations by New York Attorney General Eliot Spitzer, rating agency Standard & Poor’s is maintaining its view that downgrades will outpace upgrades for commercial insurers in the coming year.
S&P returned its outlook to “negative” for the sector shortly after the announcement of civil charges filed against broker Marsh for alleged bid-rigging and conflict of interest in commission practices. In its annual review, the rater says this negative pressure continues.
While rate increases leading up to now will continue to earn out in 2005, there is significant pressure on margins. S&P predicts the commercial lines segment will produce a combined ratio just above 100% this year, which should drop below 98% for 2005, the significant rate declines already being witnessed will place pressure on earnings which has not already been factored into many ratings.”Although an insurer may still be profitable, the margin compression may not justify the rating on a given insurer,” says S&P credit analyst Damien Magarelli.
S&P goes on to list a host of threats facing the industry: “delays in federal legislation on coverage for terrorist attacks, the postponement of reform in legislation to settle asbestos-related claims, the spread of construction-defect claims across several states, and rising directors and officers and errors and ommissions claims stemming from shareholder lawsuits, particularly against financial-services firms that have faced a barrage of legal investigations of financial services since 2000”.
While it is early yet to understand the financial impact the Spitzer investigation into contingent commissions, as well as his attack on finite reinsurance, may have, it will certainly at least hurt insurers in terms of the need to spend more responding to subpoenas in the short term and future reporting requirements in the long term. As a result of the controversy, S&P p&c ratings team leader Thomas Upton says, “in any scenario we can envision for 2005, there are going to be more downgrades than upgrades, so a negative outlook is appropriate.”
The S&P report also brings up a new area of reserving concern for insurers along with the much-discussed issues of asbestos, workers’ compensation and unresolved terrorism coverage, insurers are also putting aside significant reserves to deal with rising construction defect claims. St. Paul Travelers boosted its construction defect reserves by US$400 million, while CNA’s reserves were topped up by almost US$500 million.