S&P Foresees Conflict between U.S. Insurers, Reinsurers

According to a new report from Standard & Poor’s Ratings Services, “reinsurance companies are trailing U.S. insurers in their recognition of inadequate reserves, and as their backing turns to bad debt, conflict will ensue.”

“The warning signs are coming thick and fast,” said S&P, “among them Liberty Mutual Insurance Co.’s bad-debt provision, in a recent assessment of asbestos reserves, for 55 percent of its reinsurance receivables.” S&P credit analyst John Iten explained that “Liberty Mutual illustrates the scale of the problem.” He warned that a similar shortfall throughout the U.S. property/casualty sector, which anticipates reinsurance backing of almost $200 billion, would have pervasive consequences for ratings.

S&P’s report contends that reinsurers have been slower than primary companies to recognize shortfalls in their reserves for future payouts. “In 2003, reserve increases by reinsurers were way below the colossal actions taken by primary insurers since the fourth quarter of 2002,” commented Laline Carvalho, a credit analyst in S&P’s New York office.

The analysis also recognized that reinsurance company ratings have declined rapidly in recent years with ‘AAA’ companies becoming “an extinct breed” (Gen Re is the only major one left) S&P also described how insurers are belatedly responding to the heightened dangers by requiring reinsurers to post increasing levels of collateral.

Entitled ‘Insurers and Reinsurers: The Context for Conflict,’ the report is available to RatingsDirect subscribers at www.ratingsdirect.com.