Insurers future secure

Venkatachari Jagannathan
30 March 2002

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.