EXCESS CAPITAL AS BLESSING, CURSE

The property/casualty industry could return capital to its stakeholders without risking rating downgrades or insolvency, according to A.M. Best Company, which is conducting an ongoing analysis of risk-adjusted capitalization in the industry. However, this “decapitalization” would do little to boost anemic returns on surplus because of a lack of strong operating fundamentals and capital management skills in all but the most sophisticated organizations. The study, which assesses the capital adequacy of nearly 1,000 insurers based on their 1999 year-end capital positions, concludes the industry has excess capital, even after accounting for p/c insurers’ most severe financial risks, led by catastrophe losses, reserve deficiencies and declines in stock values. The industry’s excess capital position is expected to persist, but diminish somewhat in coming years because of lingering under-priced business, more adverse reserve development and an overall decline in surplus levels of 5 percent in 2001.