S&P’s Report Examines P/C Insurers’ Loss Deficiencies

Standard & Poor’s said that as part of its renewed focus on loss reserve adequacy, it has analyzed the loss reserves of the 25 largest property/casualty insurance groups in the U.S.

The study indicated that as of their third-quarter 2001 balance sheets, 56 percent of the groups have reserve deficiencies in excess of 5 percent of total net reserves, which Standard & Poor’s considers materially significant.

“A growing number of companies in the industry recognize that market
confidence in the integrity of their balance sheets is not just an important accounting doctrine – it is a competitive differentiator in maintaining and attracting business,” noted Standard & Poor’s director Mark Puccia. “However, a large percentage of insurers in the reserve study continue to resist the strong evidence indicating that prior years’ reserves are deficient.”

According to S&P’s, Non-material misstatements of reserves are unavoidable and will occur in the normal course of a property/casualty insurer’s business. However, unexpected changes in the business environment or willful management manipulation of the reserves can turn these minor, non-material adjustments into solvency-threatening events. Recent disclosures by some of the U.S. insurance industry’s larger players that prior-year reserves were inadequate and needed to be restated highlight that this persistent industry problem continues to threaten the credibility of many companies.

The study, which is titled “Focus on Accounting: Insurers’ Loss Reserves Scrutinized,” is available on RatingsDirect, Standard & Poor’s Web-based credit analysis system. The article can also be found on Standard & Poor’s Web site at http://www.standardandpoors.com. Under Fixed Income, select Credit Ratings Criteria.