P-C Reserve Shortfalls Worry S&P

P-C Reserve Shortfalls Worry S&P

NU Online News Service, May 11, 4:18 p.m. EDT?Standard & Poor's Credit Market Services said reserve shortfalls continue to plague U.S. property-casualty insurers, despite strong 2003 earnings, and it is maintaining a negative rating outlook for the sector.[@@]

Mark Puccia, credit analyst and managing director in Standard & Poor's Insurance Ratings group, said while some reserving error is explained by simple uncertainty, "a good deal is caused by deliberate earnings management."

"This practice," he said, "could land insurers in hot water, especially since the Sarbanes-Oxley Act took effect."

In 2002 and 2003, commercial p-c insurers added more than $40 billion to their reserves, with major contributions for workers' compensation, medical malpractice and commercial multiperil, yet they also released $5 billion for the new 2002 accident year, which could turn out to be premature, according to S&P.

The newly reported figures reaffirm Standard & Poor's heightened concerns over the commercial insurance industry's inability to accurately forecast reserves, which it highlighted in an article it published last November titled "Insurance Actuaries?A Crisis of Credibility."

Despite the mixed messages, Standard & Poor's remains concerned that reserves for old business will need further strengthening.

Meanwhile, Morgan Stanley projects a need for p-c reserves that ranges as high as $60 billion, excluding reserves for asbestos and environmental claims.

S&P said reinsurance represents a wild card in the p-c picture. In aggregate, U.S. commercial p-c insurers expect to recover about $100 billion from reinsurers, an amount that has steadily increased over the years as insurers write comparatively more long-tailed liability business. Given the increasingly contentious nature of reinsurance relationships, however, recoveries are anything but certain.

Consistently conservative reserving practices will not likely come from within the industry. "Only the combined force of regulators, investors and the actuarial profession is powerful enough to break the habit of cycle-driven reserving," observed Steven Dreyer, managing director in Insurance Ratings at Standard & Poor's. "These parties must use their influence on the management of insurance companies to do the right thing."