Canadian Underwriter

US commercial reserves continue to haunt industry

May 11, 2004   by Canadian Underwriter

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Despite strong profits achieved by U.S. property & casualty insurers in 2003, reserving issues continue to plague the industry, leading Standard & Poor’s to maintain its “negative” outlook on the commercial sector.
Although commercial insurers added more than US$40 billion to reserves in 2002 and 2003, they also released US$5 billion for the new 2002 accident year, a move S&P says could be premature and highlights the concern over inaccurate assessment of reserves. S&P points to a Morgan Stanley report suggesting U.S. insurers remain under-reserved by as much as US$60 billion, not including asbestos and environmental claims.
“While some reserving error is explained by simple uncertainty, a good deal is caused by deliberate earnings management,” says Mark Puccia, credit analyst and managing director in S&P’s insurance ratings group. “This practice could land insurers in hot water, especially
since the Sarbanes-Oxley Act took effect.”
As well, insurers continue to face the uncertainty of reinsurance recoverability. U.S. commercial writers are expecting to recover about US$100 billion from reinsurance, a figure on the rise due to growing long-tail exposures. However, whether this amount can be recovered remains a question.
Steps are needed to force the industry to maintain conservative reserving practices. “Only the combined force of regulators, investors, and the actuarial profession is powerful enough to break the habit of cycle-driven reserving,” says Steven Dreyer, managing director of S&P’s insurance ratings group. “These parties must use their influence on the management of insurance companies to do the right thing.”

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