NU Online News Service, June 10, 2:52 p.m. EDT
NEW YORK—Price declines are the biggest risk factor for primary property and casualty companies, according to Standard & Poor's, and the declines are a reason why commercial lines remains the only insurance sector with a negative outlook.
Neil Stein, director and sector specialist, P&C, with Standard & Poor's, said during the rating agency's 2011 Insurance Conference here that commercial lines are challenged by "a plethora of factors," including price declines, competition, lower demand and reduced investment income.
While reserve releases have bolstered profitability, Stein says they are unsustainable. He adds that S&P believes these reserve releases have obscured true accident-year profitability and that, as the reserve releases shrink, underwriting margins will shrink further.
Stein says improved income-statement performance and a pricing turn could lead to an outlook revision for commercial lines, but he notes the catalyst that could bring about those changes may cause S&P to maintain the negative outlook.
One positive sign, Stein says, is that he has seen an inflection point where the rate of price decreases has eased.
For personal lines, Stein says S&P maintains a stable outlook, and that the sector shows extremely strong capital adequacy.
While conference attendees cited catastrophe risk as the biggest risk factor facing insurers, Stein says, "This is what P&C companies get paid for; this is what they manage for." He adds that, with respect to the impact of catastrophe risk on ratings, S&P looks at geographic concentration, outsized losses compared to peers, and a company's enterprise-risk-management framework.
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