Chennai: The history of the American insurance market has always been packed with the woes of insurers failures. Not really. Come 2001, it became different - slightly. Despite the economic recession, the 9/11 terror attacks and the claims (life and non-life) that ensued, the number of insurers who are under the regulatory glare has come down.
According to a report prepared by Standard and Poors (S&P), only 35 insurers have come under the regulatory supervision due to last years financial stress, as against 56 in 2000 and 40 in 1999. For the beginners: insurers come under the regulatory supervision when their financial position becomes precarious and when a court orders liquidation, rehabilitation, receivership and supervision.
According to S&P, historically the companies that have failed have been the lower-rated companies. In 2001 all the insurance companies that failed and were rated by S&P had a financial strength rating below the secure level (triple-B). Only 123 financial strength ratings were raised in 2001, compared with 455 financial strength ratings that were lowered. But the overall percentage of insurers with secure ratings remained constant from 2000 to 2001 - at about 80 per cent.
The S&P study covers life and non-life (property, casualty, health) American insurers. Historically, again, property and casualty insurers have seen a higher percentage of failures than either life or health insurers. Overall, the property/casualty industry had 24 insurer failures in 2001. This is a decline of about 33 per cent from the 31 failures in 2000. Of the 1,317 property and casualty companies that S&P rates, about 219 (17 per cent) have ratings that are not in a financially secure category.
Within the property/casualty sector, S&P lowered 209 financial strength ratings in 2001 and raised just six, with seven property/casualty downgrades taking companies out of the secure range. Conversely, there was only one property/casualty upgrade in 2001 that brought a company into the secure range.
In its report, S&P states the outlook for the US property/casualty insurance industry remains negative for 2002, despite the market hardening and an increased underwriting discipline. Throughout the late 1990s, the property/casualty industry has been subject to heavy competition, which led to pricing inadequacy and a lack of underwriting discipline. The combination of soft prices and market saturation created concerns over capital adequacy throughout the industry.
Through the latter part of 2000, the industry began to make up the lost ground in these areas. The continued capital concerns required companies to price aggressively to mitigate capitalisation pressures going forward, the report says.
Simultaneously, the 9/11 events created a change in perception of terrorism risk. Prior to the 9/11 events, terrorism was an additional coverage for which policyholders were rarely charged. In addition, the global property/casualty industry has seen an influx of nearly $30 billion of capital, of which US property/casualty insurers accounted for about $5 billion.
The S&P study says the 20 insurers and reinsurers with the greatest exposure to 9/11-related losses account for about 80 per cent of the total loss estimates. These companies had an aggregate capital of about $300 billion before the attacks. None of these companies are rated below the A category, and none has an exposure large enough to threaten its solvency. After the attacks, S&P downgraded 11 companies, but feels the limited impact on ratings from the terrorist attacks reflects the overall strength of the insurance industry.
Both mould and asbestos claims continue to affect the property/casualty industry through a growing number of court cases. Although the ultimate cost of payouts is uncertain due to continued litigations, the frequency of these cases will increase, as will the payouts.
Although the Enron collapse did not directly contribute to any of the insurance failures in 2001, the situation brings heightened attention to asset quality, directors and officers coverage and surety exposures. S&P estimates the insurance industrys total investment exposure to Enron and its affiliates is more than $3.5 billion, with about $2.6 billion of that exposure in the life industry.
Surety losses could more than double the $1.2 billion of losses experienced in 2000. Of further concern is directors and officers coverage, which could lead to more payouts if Enron executives are found liable.
Health outlook negative
The global rating agency recently revised its outlook on the health insurance/managed care industry to negative from stable because of increasing negative pressures on the industry. Rising medical costs, the current weak economy, and a growing demand from consumers for increased choices are some of these pressures. Small and geographically concentrated companies - as well as those with weaker balance sheets or lacklustre earnings - will be the most susceptible to these pressures.
Of the 35 insurance companies that failed in 2001, 11 were health insurers and HMOs. These companies were primarily small, writing business in only one or a few states. Though this is a 31-per cent decline from the 16 that failed in 2000, size remains an increasingly important factor for success in the industry. S&P rated only one of the 11 companies that failed in 2001, and the company had a rating that was below the secure level. Of the 241 health insurance companies rated by S&P, 64 (26.5 per cent) have ratings below the secure level.
Life outlook stable
None of the failures in 2001 were life insurance companies, compared with five that failed in 2000. Of the 587 life insurance companies rated by S&P, 145 (25 per cent) have ratings below the secure level.
S&P recently revised its outlook on the life sector to stable from negative. In 2001, life insurers showed stability based on strong operating fundamentals. Industry strengths included extremely strong capitalisation and operating performance, high-quality investment portfolios, and general stability of need and protection-based products. But the industry does face some challenges from continued deterioration of asset quality, increased defaults, and earnings pressure, particularly on annuity businesses.
S&P believes that in 2002, well-positioned life insurance companies will have sustainable competitive products or distribution advantages, diversification of products and earnings, brand recognition or a protected niche, operational efficiency, and economies of scale in major lines of businesses. Vulnerable companies will have concentrated revenues or product lines, exposure to consolidation, higher-than-average investment risk, or will be heavily influenced by price competition.