S&P’s Maintains Negative Outlook on Commercial Insurers

December 5, 2002

U.S. commercial-lines insurers are still plagued by inadequate reserves, according to Standard & Poor’s just-published outlook for 2003, and bullish pricing cannot simply sweep the problem away.

Standard & Poor’s outlook on the sector remains negative. Of the U.S.
commercial lines insurers interactively rated by Standard & Poor’s, about 40 percent have a negative outlook or CreditWatch, while only three percent have positive outlooks.

“We’re in the midst of the hardest market in recent memory,” Mark Puccia, managing director in Standard & Poor’s insurance ratings, commented “yet the prospects for many companies remain uncertain because of reserving issues. This credibility gap is undermining the industry.”

Premium-rate increases clustered in the 30 percent-50 percent range are the industry’s response to reduced capital levels, a heightened perception of risk since Sept. 11, 2001, and soured investments. But improved pricing conditions would have to prevail through 2004 to provide a floor for ratings.

Meanwhile, “insurers are still digging themselves out from a legacy of
underpricing throughout most of the 1990s,” according to the report, which describes asbestos, workers’ compensation, and professional liability as the most troublesome areas with respect to the inadequacy of reserves to cover future payouts.

The report also looks in detail at the implications of the Terrorism Risk
Insurance Act just signed into law, warning that it subjects insurers again to an exposure they had largely shelved since Sept. 11, 2001. Entitled ‘U.S. Commercial Lines Insurance Outlook 2003: a Study in Paradox’, the report is available to RatingsDirect subscribers at http://www.ratingsdirect.com.

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