A.M. Best Study: P/C Industry’s Risk-Adjusted Capital Fell in 2008

November 3, 2009

The U.S. property/casualty industry experienced a 17 percentage point decline in risk-adjusted capitalization in 2008, according to A.M. Best Co., which conducted a four-year study.

However, the capital still exceeded adequate levels thanks to excess from previous years.

Using its proprietary capital model, Best’s Capital Adequacy Ratio (BCAR), the rating firm found that the decline in risk-adjusted capitalization was driven by a combination of a nearly $60 billion drop in reported policyholders’ surplus and a reduction in the amount of equity credit given for fixed income securities in the BCAR model.

Much of the downward pressure was effectively cushioned by the excess capital built up from several consecutive years of
surplus growth prior to 2008, such that the industry’s median risk-adjusted capital levels at year-end 2008 remained well above the typical BCAR guidelines for A.M. Best’s highest rating level.

Still, A.M. Best said, ample concerns remain, including competitive pressures (particularly in commercial lines); the negative effects of macroeconomic conditions on exposures and the possibility that some insurers have been too optimistic with the magnitude of favorable loss reserve development taken in recent calendar years on recent accident years.

A.M. Best’s study also evaluated risk-adjusted capitalization trends for major market segments (commercial, personal and reinsurance), surplus size and organizational types and found the following:

  • Each of the main segments’ median risk-adjusted capital levels remained well above A.M. Best’s typical BCAR guidelines for its highest rating level, but only the U.S. reinsurance segment reported an increase in median risk-adjusted capital levels at year-end 2008.
  • Median risk-adjusted capital levels across each surplus size group remained strong. Smaller insurers, however, tended to experience greater year-to-year volatility in the components of required capital than did the larger insurers.
  • While the median risk-adjusted capital for stock and mutual insurers at year-end 2008 remained solid, mutual insurers maintained a higher median score throughout the study period.

Source: A.M. Best Co.

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