U.S. P/C Insurers’ Reserving Likely To Remain Prudent, S&P Says

October 1, 2007

Will increased competition and lower pricing lead U.S. property/casualty insurers to skimp on reserves? Not according to a report published by Standard & Poor’s Ratings Services.

The article, “For U.S. Property/Casualty Insurers, Is Less-Disciplined Reserving Once Again On The Horizon?,” acknowledges that the industry’s underwriting discipline historically has wavered during the softer phase of the underwriting cycle, and this could happen again. However, S&P believes that most companies’ recent emphasis on enterprise risk management (ERM), corporate governance, and Sarbanes-Oxley will lead them to maintain prudent reserve levels.

In 2006, U.S. property/casualty insurers had a net reserve release of $7 billion. This was the first net reserve release since 1998, though it is far smaller – both in absolute dollars and as a percentage of total loss reserves – than 1998’s $18 billion release. The overall reserve adequacy in 2006 stemmed from high property/casualty premiums and conservative reserving practices over the past few years.

Keen competition was a defining characteristic of the property/casualty insurance market starting in the late 1990s, especially in 1997-2001. In response, insurers were less conservative with their underwriting practices and pricing, and they largely got away with it because they could offset underwriting losses with the high investment returns then available. Today’s market profile is dramatically different, the S&P report says. Interest rates are substantially lower, and equity markets are volatile. Consequently, insurers need to price and reserve for their risk exposures so that their underwriting decisions remain prudent on a stand-alone basis. And state-of-the-art risk-measurement tools are helping them do so more effectively than ever before.

S&P noted that despite its belief that management teams are disciplined in their loss-reserving processes, the ratings agency will continue to monitor insurers’ reserving activities carefully – both quantitatively and qualitatively. It said it will monitor the reserve estimates of the industry’s relatively unseasoned accident years as more claims get reported, especially for the commercial lines.

Source: Standard & Poor’s, www.standardandpoors.com

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