NU Online News Service, Sept. 6, 3:25 p.m. EDT
With pricing showing signs of stabilizing, and solid capital adequacy and balance-sheet strength, Moody's Investors Service has revised its outlook on U.S. commercial insurance to "stable" from "negative."
"The U.S. commercial-lines insurance sector…should remain financially sound despite a prolonged weak U.S. economy and a soft—though moderating—pricing environment," Moody's says. The rating agency notes that the industry shows strong asset quality and a conservative investment profile, an overall sound reserve position, and strong holding-company liquidity.
Pricing for commercial and specialty insurers, Moody's says, seems to be stabilizing through the 2011 first half after eroding over the last five to seven years. Moody's says recent catastrophe losses and changes to widely referenced catastrophe models "will help to push up renewal rates for primary property-insurance coverages," driven in part by upward pressure on reinsurance rates.
Casualty lines, though, which represent about three-fourths of commercial-insurer premiums, "will likely experience weaker results, given already high combined ratios, and—by our estimates—recent weak accident-year reserve margins," Moody's says.
Moody's says that absent a sharp upward pricing swing from a "potential shock to the system," profitability for casualty lines will remain pressured over the next 12 to 18 months. But the rating agency adds, "Notwithstanding these pressures, and in part because of them, we expect that pricing stability or strengthening going forward will help to soften the cumulative impact for the recent down cycle and to ensure that it does not approach the depths of the prior down cycle in 1997-2001."
In fact, Moody's differentiates this cycle from the 1997-2001 one in other ways as well. The rating agency says this time around, there is not an abundance of underpriced reinsurance capacity, and there is a broader awareness of executives' and chief actuaries' critical roles in assuring a timely feedback loop among underwriters, claims adjusters and pricing and reserving functions.
"Finally," the rating agency adds, "Moody's believes that the establishment of more formalized risk-management protocols and the demands of Sarbanes-Oxley compliance today provide a more robust framework for a stricter adherence to prudent standards, as well as a clearer set of tolerances for error and consequences for failure to adequately manage the core business and financial risks."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.