Well-capitalized (re)insurers relying too heavily on others to resolve cash-flow problems: S&P’s

Facing a potential liquidity crisis as the 2008 hurricane season ramps up to the midway point, insurers may be running the risk of relying too heavily on state-sponsored entities and low-rated or unrated reinsurers, Standard & Poor’s (S&P’s) observes in a recent report.
The report, published Sept. 11, is entitled: “Will Catastrophe Events Create Liquidity Strain For Property/Casualty Insurers?”
“As property/casualty insurance companies examine their risk controls and test liquidity scenarios, the question arises as to whether the reliance on state-sponsored entities may be too high,” S&P’s notes in its report.
“There also is the concern that to offset the costs associated with the higher concentration of correlated reinsurance recoverables between insurance and reinsurance companies following a catastrophe event, some insurers may be engaging lower-rated or unrated reinsurers to satisfy this need for added capacity, thereby sacrificing their reinsurance program quality.”
These factors may raise the correlated risk for the industry and for certain companies in a large catastrophe event, as state-sponsored entities find an increasingly sizable breadth of companies applying for reinsurance support, S&P’s notes.
“These companies, although adequately capitalized, may look to the state-sponsored entities to aid their cash-flow needs,” the report says. “If the needs go unmet, companies may go elsewhere to supplement their reinsurance requirements, which could lead to quality slippage.”
S&P’s said it expects insurers to avoid these dilemmas by demonstrating appropriate liquidity levels.