S&P Says Poor Stock Performance Could Drive Up Rates

The poor performance of stocks could drive insurance rates upward because reserves will be inadequate to deal with losses, according to a report from Standard & Poor's Ratings Services.

In its report, "Insurers' Reserve Adequacy Will Come Under Pressure As Operating Profitability Worsens," S&P said the p-c industry has experienced a declining pricing scenario in the past couple of years following a period of strong pricing that started in 2002 that is affecting reserve adequacy.

Adding to the already weakened pricing environment is the monumental financial crisis facing the global financial markets. With increased pessimism in the global economy and the unprecedented volatility in the financial markets, insurers' loss reserve adequacy, which had been a matter of secondary consideration in the past few years, may once again drive ratings, said S&P.

In today's investment environment, p-c insurers that focus primarily on long-tail businesses, such as workers' compensation, that take many years to settle claims after an insurance event, cannot expect to offset underwriting losses through investment incomes as they did during the 1990s, the firm noted.

During the previous soft pricing cycle in the 1990s, the technology and dot.com bubble created a booming stock market and generated a stream of strong investment incomes for insurers that overshadowed their lackluster underwriting performances. Today, however, the prospects are slim for a similarly robust investment performance anytime soon, according to S&P's analysis.

Adding to the current uncertainty, the firm said, is the potential for significant future losses to emerge from directors and officers and errors and omissions claims related to the capital market disruptions. Over the next few years, it was estimated, those claims could hit about $10 billion.