S&P Report Blasts Actuaries

By Gary Mogel

NU Online News Service, Nov. 21, 11:29 a.m.EDT?The "ongoing parade of reserve additions" by U.S.property-casualty insurers calls into question the credibility ofinsurance actuaries, according to a recently released report by NewYork-based Standard & Poor's Rating Services.

Reserve additions by insurers in 2003 will likely exceed the"massive" $22 billion total for 2002, which itself outstripped the$11.6 billion total for 2001, the report noted.

"Actuaries are signing off on reserves that turn out to bewildly inaccurate," said Steve Dreyer, an analyst in S&P'sinsurance ratings division. "It's an abysmal track record."

The report complains of "huge surprises" in reserving additions,as insurers reassess their requirements for future payouts.

According to the S&P report, the actuarial profession "maybe excused" for underestimating asbestos liabilities, whichcomprised $10.9 billion of 2002's reserve additions. But, apartfrom that, ?the average commercial lines writer is not properlyassessing its risk in normal bread-and-butter business," saidS&P credit analyst Sid Ghosh.

Among the ways insurers "suppress bad news," according to thereport, are: spreading reserve additions over several quarters;drawing reserves from one business line to mask deficiencies inanother; relying too heavily on reinsurers to carry their liabilityburdens; and using complex reinsurance arrangements to take credittoday for expected future investment earnings on reserves.

"The accounting profession has come in for a lot of criticism inrecent years for signing misleading financial statements," Mr.Dreyer noted. "Meanwhile, the insurance industry has done somethingalmost as egregious by, in effect, overstating prior-year earningsby billions of dollars. Somehow, actuaries have avoided thespotlight for abetting this."

The insurance industry's reserving problems can to some extentbe alleviated, the report pointed out, by the use of outsideconsultants and by conducting asbestos studies from the ground up,meaning every account and every claim is examined for potentialexposure.

The report goes on to say that insurers would be better servedby publishing estimates of future liabilities as a range, ratherthan as a single number, and by attributing these to individuallines of business.

The report, "Insurance Actuaries--A Crisis of Credibility," canbe accessed on a subscription basis at www.ratingsdirect.com.Nonsubscribers can order it at www.standardandpoors.com.