S&P Warns P/C Insurers on Reserving Practices

June 3, 2010

Property/casualty (P/C) insurers have turned to releasing significant amounts of reserves in the past couple of years, even as the underlying business conditions have deteriorated, but may have to slow this practice, according to Standard & Poor’s Ratings Services.

“We now believe that after years of large reserve releases from recent accident years, companies likely won’t be able to continue at this pace,” said Standard & Poor’s credit analyst Siddhartha Ghosh, author of an article titled “Why U.S. Property/Casualty Insurers Might Have To Put The Brakes On Reserve Releases.”

Weak economic recovery prospects, shaky consumer confidence stemming from high unemployment, and a prolonged soft underwriting cycle will make it difficult for the U.S. P/C insurance industry to sustain its historical operating profitability, the S&P analyst contends.

In addition, lower revenue income from a decline in payrolls and sales, excess capacity in the industry, continuing price declines, and reduced net investment income resulting from low investment yields are going to weaken insurers’ operating profitability in the years ahead, according to the forecast.

S&P also said it believes that as the current soft market cycle continues, some P/C insurers could upwardly revise their prior-year reserve estimates, especially for some of the longer-tail lines.

Ghosh said if S&P finds that a P/C insurer’s required reserves are inadequate, it might adjust the company’s reserve adequacy, earnings, or capital adequacy. “In some cases, this could, based on materiality, result in rating actions,” Ghosh said.

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