Inadequate reserves greater threat than cat losses
Inadequate loss reserves and pricing proved much greater threats to the financial stability of US insurers last year than catastrophic losses – despite a number of costly catastrophes hitting the insurance industry in recent years.
That is the conclusion of a report by AM Best examining the underlying problems of insurers categorised as financially impaired companies (FICs) by the rating agency last year. Nineteen insurers were categorised in this way last year, one life and health businesses and 18 property/casualty companies.
AM Best designates a company as a FIC when a first official regulatory action is taken against the company as a result of concerns of the insurer’s ability to conduct normal insurance operations. This could also mean its capital and surplus have been deemed inadequate or its financial condition has triggered regulatory concern.
“Despite the extent of the industry’s catastrophic losses in the past few years, the 18 property/casualty FICs in 2012 were less than half of 2011’s 34,” the report said. The number was also way below the historical average (since1969) of 25.8 impairments of property/casualty per year.
Instead, the most common reasons for the companies’ troubles were deficient loss reserves and inadequate pricing, the report said. Only one company’s impairment was attributed directly to catastrophe losses.
