While the property-casualty insurance industry is showing signs of continued improvement to its bottom line, the industry still is faced with challenges from continued downgrades and a substantial loss-reserve deficit, according to a special report from A.M. Best.
The analysis, titled "Despite Continued Market Improvement, Rating Downgrades Outpace Upgrades," was written by Michael Venezia, senior financial analyst with the p-c division of the Oldwick, N.J.-based rating agency.
Mr. Venezia wrote that despite strong operating momentum that has contributed to insurers' surplus base, the industry needs several more profitable years to overcome a $59 billion loss-reserve deficiency. The deficiency, he notes, is driven by asbestos and environmental liabilities and medical-cost inflation. These concerns are compounded by weather-related severity losses.
There is also concern on the reinsurance side, hit by the 2005 catastrophes, which, he said, would have a negative impact on their balance sheets.
The downgrade trend is seeing some reductions, however, Mr. Venezia went on to write, but that did not alter the fact that on the p-c commercial lines side, between July 2004 and July 2005, there were 53 downgrades and 22 upgrades. In personal lines, the report said, there were 32 upgrades and 26 downgrades.
Rate hardening will allow some companies to continue to see improvements, Mr. Venezia wrote, but "adverse reserve development and stock-market skittishness contribute to a weakened risk-adjusted capital position for many carriers."
There are also the adverse effects of the recent soft market that have left "many carriers weakly positioned" to take advantage of the hardening pricing cycle to take on more risk, he wrote.
Insurers that have maintained "strong balance sheets, conservatively set loss reserves and consistently adhere to stringent operating controls" will be in a position to benefit from a changing market and strengthen their capital position, Mr. Venezia noted.
Copies of the 10-page report are available in PDF format, with an additional spreadsheet file, at www.bestweek.com.
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