P-C Industry Remains
Underreserved, Best Says
While property-casualty insurers are showing signs of continued improvement to their bottom lines, the industry is still faced with a substantial loss-reserve deficit, A.M. Best warns.
The Oldwick, N.J.-based rating agency's analysis–"Despite Continued Market Improvement, Rating Downgrades Outpace Upgrades"–was written by Michael Venezia, a senior financial analyst.
Mr. Venezia wrote that despite strong operating momentum that has contributed to insurer surplus, the industry needs several more profitable years to overcome a $59 billion loss-reserve deficiency driven by asbestos and environmental liabilities as well as medical-cost inflation, 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.
While the downgrade trend is seeing some reductions, Mr. Venezia noted, 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, while in personal lines, 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 by taking 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, he noted.
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