S&P: Asbestos Risk? It's Smoke And Mirrors
NU Online News Service, March 31, 4:18 p.m. EST?Asbestos exposure is creating a rift between insurers and reinsurance companies that back them, said Standard & Poor's Ratings Services in a new study.
In a report released today entitled "Asbestos Driving a Wedge Between Insurers and Reinsurers," the New York-based ratings agency argued the reinsurance community as a whole has not stepped up to adequately address asbestos risks.
The reinsurers have been expected to share more of the burden by leading property-casualty insurers who have been putting up massive increases in their reserves for future payouts, the S&P said.
"Disputes between insurers and reinsurers appear to be intensifying. The tone is getting ugly," said Steve Dreyer, managing director at S&P.
One case described by the ratings agency is Bermuda-based ACE Ltd., which announced a $2.2-billion addition to gross reserves for asbestos last January 2003. But with only a $500 million boost to net reserves, after expected reinsurance, the move signals an "overweening dependence on reinsurance" for an exposure representing about 30 percent of ACE's capital base, S&P said.
To illustrate recent reserve increases among U.S. insurers, the report pointed to, among others, Hartford, Conn.-based Travelers Property Casualty Corp., which topped the list by boosting its reserves by $2.5 billion in its last fourth quarter.
"Across the industry, the difference between net and gross numbers raises all sorts of questions about who's ceding what to whom. It's smoke and mirrors. The liabilities are disappearing into thin air, and nobody's capturing them," said John Iten, director at S&P.
The report said reinsurers have not matched these exposures with commensurate increases in their own reserves. This is in part because of a natural lag in the process, S&P said.
But, more worryingly, the rating firm said, it is also because insurers are often failing to inform reinsurers about what level of reimbursement they are expected to come up with, even when primary companies have built that anticipated income into their own bottom line, according to the study.
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