Distant Thunder: Will P-C Insurers Survive The Capital Storm?

Property-casualty insurers in the United States collectively made reserve adjustments totaling about $20 billion in 2002, observed Vincent Dowling, an insurance stock analyst at Dowling & Partners based in Farmington, Conn. The companies that announced these reserve increases are among the most conservatively managed operations in the industry, he noted, which suggests that there are likely many more less proficiently run insurers who still have to "take their hits." There is also the question of how many of these less well-managed companies actually realize their true loss exposures, he added.

There is even concern with the structuring of the reserve adjustments made by the companies that have stepped forward, said Steve Dreyer, insurance practice leader at Standard & Poors Ratings Services in New York. Notably, many of the reserve increases have been heavily reliant on collectable reinsurance, he added, and there is growing concern that these reinsurance covers may not be recoverable. Some companies may not be able to pay, while others will dispute claims, he said.

"If you look at these reserve adjustments, and say the ACE [group] announcement to increase reserves by $2.2 billion with $1.9 billion [of the total] being reinsurance–Id be happier if the reinsurer was standing next to the insurer when the announcement was made."

In this respect, Mr. Dowling noted that there has been an increase in the number of recoverability disputes between insurers and reinsurers over recent years.

"What troubles me about reinsurance is the [significant] number of companies currently engaged in litigation with their primary companies," said Jeff Post, president of Firemans Fund Insurance Co. in Novato, Calif. He said that the relationship between reinsurers and insurers is no longer an arrangement of "good faith."

"The positive twist to this more resolute attitude by reinsurers against paying freely is that this has resulted in more management discipline at the primary level, he added.

However, whether reinsurance is ultimately recoverable or not, the fact is that reinsurers have been slow in paying, which has to affect the balance sheets of insurers, commented Chris Winans, senior research analyst at Williams Capital Group in New York.

The financial strength of insurers and their reinsurers is an issue of growing importance to risk managers, said Lance Ewing, executive director of risk management at Park Place Entertainment Corp. and incoming president of the Risk and Insurance Management Society. With all the attention drawn by the insurers multibillion-dollar reserving adjustments, "risk managers are now taking a really good look at insurer financial strength," he added.

Hyatt Brown, president of Daytona Beach, Fla.-based brokerage group Brown & Brown Inc., confirmed a sense of increased caution in the marketplace with regard to the placement of business relative to the financial soundness of carriers. Recent company reserve actions have made it apparent that the "front line risk takers," being primary insurers, are facing the greater risk, and this is causing caution, he observed.

The industrys ongoing capital weakness will see more company rating downgrades than upgrades this year, predicted Mr. Dreyer. As a result, S&P will maintain a negative outlook on the p-c insurance industry this year, he added, with the view of changing this to "stable" if the firmer pricing momentum of the hard market continues into 2004.

Matt Mosher, group vice president for property-casualty at A.M. Best, said his firm also holds a short-term negative view on the industry. However, he expects that the number of company downgrades this year will be lower than 2002. "Our goal is to have accurate ratings, not lower ratings."

In response to the capital pressure on insurers, Mr. Post laconically observed: "Were [the industry] eating up capital faster than its [becoming] available. I wouldnt be surprised if we end up with an insurer with a B rating being seen as [having] a good rating."

Attracting capital into p-c insurance is currently one of the greatest challenges facing the industry, he added. "We [the industry] have done a lot of harm to ourselves through reserve deficienciesOur challenge is getting over our self-inflicted damage. This is the only way to attract capital into the business," he said.

"The vote [in the investment community] right now is that we are not responsible users of capital."

Applying "front-line" discipline is critical to achieving "cycle stability" and therefore a healthy industry, noted Judy Mann, senior vice president at Swiss Re in Calabasas, Calif. The last "soft market" was predictable, she added, but the industry lacked the ability to take action in a responsive manner.

"Is cycle management really people management?" Ms. Mann asked. To avoid the mistakes of the past, the industry has to place greater emphasis on controlling the authority, accountability and training of personnel. "There has to be a clear message to the front line that if returns arent there, then there has to be a reduction in the top-line."

"We have to use this hard market to get our houses in order," she said.

Sean van Zyl is the managing editor of Canadian Underwriter. (Canadian Underwriter is not published by The National Underwriter Company.)

"Were eating up capital faster than its [becoming] available. I wouldnt be surprised if we end upwith a B rating being seen as a good rating," one insurer said.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.