Insolvency Rate Will Continue: Best

By Susanne Sclafane

NU Online News Service, June 20, 11:38 a.m.EST?Counting 60 property-casualty insurance companyinsolvencies over a two year period, rating agency A.M. BestCompany predicted that a similar pace of insolvencies will bereported for the next year or two.

In a report released yesterday, the Oldwick, N.J.-based ratingfirm said there were 30 p-c insolvencies in 2001, and added that 23out of the 30, roughly 77 percent, became insolvent due todeficient loss reserves.

While that proportion was similar in 2000, when the firm saidthat 70 percent of the 30 insolvencies in that year stemmed fromreserve issues, both percentages jumped significantly fromhistorical levels. Best said that the insolvency rate frominsufficient reserves has historically ranged from 30-to-35percent.

Best also said that there were only seven p-c insolvencies in1999 and 18 in 1998.

A.M. Best's insolvency report is the third report released by arating agency on the subject this year.

In January, Weiss Ratings in Palm Beach Gardens, Fla., reported34 p-c failures for 2001, compared to 27 in 2000.

In April, Standard & Poor's in New York saidproperty-casualty failures numbered 24 in 2001, down 23 percentfrom 31 failures in 2000.

While the three reports each offered slightly differentinsolvency counts, even analysts at S&P, which reported adecline in insolvencies last year, put reserve issues high on theirlist of concerns for the industry.

During a conference call earlier this week, S&P analysts,who were discussing the firm's 2002 Mid-Year Outlook reports (firstreleased at an S&P Insurance Conference in early June), saidthat reserve additions did not end with the "kitchen-sink" fourthquarter of 2001.

(During the fourth quarter, a number of insurers and reinsurersadded to reserves and dumped other charges into their earningsreports, causing many analysts to refer to the quarter as a"kitchen-sink" quarter.)

Fred Sklow, who discussed the commercial lines segment duringthe conference call, said that S&P expects reserve additionsthis year related both to the World Trade Center event and asbestosliabilities.

Although S&P's estimate of the shortfall in reserves forasbestos claims is at the low end of a widely-reported range of$20-$40 billion, Mr. Sklow said that S&P expects asbestosreserves to be strengthened by $5-to-$10 billion in 2002.

Laline Carvalho, an associate director, who reported on thereinsurance sector, added that the p-c industry is also grapplingwith issues related to professional liability coverage, includingdirectors and officers, where "the industry's reserves in no wayresemble adequacy."

Don Watson, director of insurance ratings, who moderated thecall, commented on workers' compensation reserves in S&P'swritten report on the property-casualty sector. Noting that theNational Council on Compensation Insurance puts reservedeficiencies for workers' comp at $21 billion, he said in thereport that number "should mark the floor for where the trueshortfall lies."

In a report on financial results for 2001 released late lastmonth, A.M. Best said that adverse development for all linesamounted to $11.4 billion last year.

In its more recent report on insolvencies, predicting that thepace of downgrades to "E" (under regulatory supervision), wouldremain high this year, Best said that the commercial lines marketis likely to face a greater number of insolvencies than either thepersonal lines or the reinsurance segments.

"Underpricing and under-reserving have been more egregious inthe commercial segment than in personal lines, and reinsurersgenerally have strong parental support," Best reasoned.