Despite Better Pricing, A.M. Best Reports P/C Rating Downgrades Outpace Upgrades

October 8, 2002

The property/casualty industry saw a gain in the number of rating downgrades issued by A.M. Best Co. for the second consecutive year, according to the special report, “Rating Downgrades Outpace Upgrades Despite Improved Pricing,” released by A.M. Best.

Rating activity for the property/casualty industry resulted in 1,442 rating actions: 69 percent affirmations, 24 percent rating changes (positive and negative) and 7 percent placed under review during the 12-month period ended July 11. Despite the challenging market conditions, the majority of insurers were able to maintain prior rating levels highlighting the relative capital strength that still exists within the industry.

While the property/casualty industry lost a significant amount of capital through insured losses related to the World Trade Center catastrophe, it was not the trigger for the majority of the rating downgrades issued over the period.

The leading factor, by far, was the adverse development of prior accident-year loss reserves, especially for commercial-lines insurers and reinsurers exposed to long-tailed liability lines, such as workers’ compensation and medical malpractice. Additionally, increased loss costs related to auto-liability claims and the not-yet-realized exposures to mold claims have stretched the reserves of several personal-lines insurers.

The magnitude of realized reserve deficiencies is, in some cases, staggering and has led to rapid declines in capitalization and A.M. Best ratings for several insurers. The industry’s aggregate reserve deficiencies also highlight the recipe for disaster that existed within the marketplace during the mid-to-late 1990s, as companies lowered rates to either gain or maintain market share while an unforeseen increase in loss-cost trends occurred.

Over the past year, the number of rating units considered secure – rated B+ (Very Good) or higher – decreased from prior-year levels – to 84.3 percent of total ratings in 2002, from 85.6 percent of total ratings in 2001.

Additionally, during the recent 12-month period, the number of rating units considered Superior (rated A+ or higher) decreased to account for less than 10 percent of total ratings for the only time in the recent five-year period.

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