S&P Enhances Criteria to Evaluate Loss Reserves of Global Reinsurers

Standard & Poor’s has recently enhanced its criteria for evaluating the loss reserves of global reinsurance groups and certain non-U.S. insurance groups writing casualty business, according to a recently published report.

Loss reserving for property/casualty reinsurance and insurance groups has had a checkered recent history, particularly where it has involved U.S. casualty business. Over the past three years, many groups have had to make additional provisions for past underestimations of loss reserves (so-called “reserve strengthening”), which has simultaneously reduced the U.S. insurance industry’s pretax earnings and capital by more than $35 billion in the past three years. “The analysis of loss reserves is often the most challenging component in evaluating an insurer’s current balance-sheet strength. Analyzing the current balance sheet is, in turn, an important component in determining the overall rating,” said Standard &
Poor’s credit analyst Rob Jones.

Standard & Poor’s will analyze the adequacy of property/casualty
reinsurance and insurance loss reserves using conventional actuarial
techniques. The new criteria will be applied to:

— All reinsurance groups (including those filing Annual Statements in the U.S., as Standard & Poor’s considers the Schedule P disclosures in those statements to be inadequate for reinsurers);
— All subsidiary companies of groups writing a material proportion of
third-party reinsurance business;
— All non-U.S. primary insurance companies writing a material proportion of casualty business; and
— All reinsurers and insurers where credit is given for surplus reserve
adequacy in Standard & Poor’s capital adequacy model.

Each of these groups and companies will be asked to complete a
loss-reserving spreadsheet model for individual casualty classes of
business, representing at least 85% of total casualty loss reserves
(excluding asbestos and environmental claims, which will be subject to separate analysis).

“The results derived under the new criteria will not be viewed in
isolation, and will be compared with any third-party actuarial analysis,” added Jones. Analysts will also continue to obtain details of the historic run-off profits and losses by class of business and
triangulations of ultimate/terminal loss ratios (that is, including the
insurer’s estimate of incurred but not reported reserves).

Appropriate adjustments will also be made in Standard & Poor’s analysis of capital adequacy and operating performance to reflect the impact of the economic level of loss reserves on capital and earnings.

The report, “Property/Casualty Reinsurance and Insurance Criteria:
Evaluation of Loss Reserves Enhanced,” was published on April 16, 2004, and is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.