P/C Reserves in for Tighter Scrutiny

The property/casualty industry’s reserves will be scrutinized more closely, Fitch Ratings has announced.

Specifically, Fitch’s analyses will target reserves from U.S. casualty business written between 1997 and 2001, as well as exposures to asbestos claims from business written prior to the 1980s.

Given recent large charges for asbestos liability exposures by Travelers and ACE, as well as charges for more recent accident years’ business by AIG and others, Fitch believes that a number of other insurers will need to recognize reserve shortfalls in the near-term.

The ratings agency said it has been concerned for some time that insurance and reinsurance companies’ reserves were inadequate with respect to their exposure to asbestos liability and accidents, as reflected in its negative rating outlook since 2000 for both U.S. commercial lines and global reinsurance industry sectors.

While Fitch’s efforts will focus on U.S. commercial lines insurers and reinsurers, it will also include non-U.S. companies that underwrite U.S. risks via assumed reinsurance and on a direct basis via the London market or other channels.

With respect to asbestos claims, Fitch established a survival ratio target of 16 times in July of 2002. The survival ratio is a simplistic measure of relative reserve adequacy that compares the level of asbestos reserves to average claims payments.

Given recent charges by Travelers and ACE, Fitch is now confident that its 16 times survival ratio target is indeed a reasonable industry benchmark, and will begin to apply this standard more strictly in the rating process. Fitch plans to discuss with companies’ management the current status of any grounds up or other asbestos reserves analysis they have conducted, and compare the results relative to this benchmark.

Regarding casualty exposures for the 1997-2001 accident years, Fitch plans to discuss in detail with management updated reserving studies completed at year-end 2002. Fitch is especially concerned with assumptions made for medical cost inflation, as well as management’s ability to detect increases in loss severity for liability lines.

Regarding the latter, Fitch will also focus on management’s prowess in analyzing loss data for primary versus excess layer exposures, which Fitch believes varies widely among companies.