A.M. Best Report Shows Property/Casualty Industry Excess Capital as Blessing, Curse

February 16, 2001

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 property/casualty insurer’s 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 2000 and beyond because of lingering under-priced business, more adverse reserve development and an overall decline in surplus levels of 5% in 2001. Effective in 2000, A.M. Best began publishing absolute BCAR values for property/casualty insurers in its electronic products.

The capital strength of nearly 1,000 property/casualty organizations rated by A.M. Best, as measured by their BCAR ratios, along with other financial indicators are reflected in the appendix to the Excess Capital report. The industry data in the appendix is also available in Excel spreadsheet format. This format will facilitate benchmarking, ranking and industry segmentation in terms of relative capital strength and performance levels.

BestWeek subscribers can download a printed copy of the full 26-page report for $25, or a combination of the printed report plus the spreadsheet file of the study data for $100 from our website at www.bestweek.com.

Non-subscribers can download a copy of the full 26-page report for $75, or a combination of the printed report plus the spreadsheet file of the study data for $200 from www.bestweek.com. An updated BCAR criteria report that draws from two previously published special reports will be made available on A.M. Best’s website in spring 2001.

This report will provide an overview of the latest BCAR calculation, major components and typical adjustments made within A.M. Best’s capital adequacy model. In addition, an updated 2001 capital study will be available later this summer, reporting on the industry’s capital adequacy as it relates to insurer’s individual year-end 2000 capital positions.

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