S&P remains cautious on industry’s prospects

02-06-2014

Despite many changes that have modernised the insurance industry over the past 30 years, ratings, on average, have declined during that period Standard & Poor's (S&P) has revealed in a report that also stresses its caution on the industry’s prospects.

The rating agency released a number of findings that tie in with the fact that it has been 30 years since it has began holding an annual conference that explores the latest developments in the insurance industry.

It notes that in that period, there have been many transformations in how the insurance business is done. Technology has fundamentally altered many aspects of day-to-day operations and risk management. Distribution has shifted to new methods, such as a telephone operator or websites.

Regulation has also modernised with the addition of risk-based capital, greater use of stochastic testing, and higher focus on risk management, S&P notes.

But it says these changes have not necessarily improved the industry in the way that might have been expected. “Although ratings on insurers have remained high among sectors that we rate, they have declined on average during the past 30 years,” it said in the report.

“As much as technology and regulation have improved risk management, so have they increased risk, with more information in the hands of consumers and insurance brokers leading to fierce competition on price and product features. Also, the demutualisation of many large insurers has led generally to greater efficiency but also to more-aggressive capital management to balance the sometimes conflicting priorities of shareholders and policy holders.”

It concludes that while it expects ratings to remain generally stable, it remains cautious on the industry’s prospects.

“Our ratings on US insurers have generally been stable since the financial crisis, and for the most part we expect them to remain so. The sluggish economy and low interest rates have constrained profits and made near-term upgrades unlikely,” the report said.

“Here's the big unknown: if conditions improve, will mergers and acquisitions or aggressive pricing and product design accelerate, bringing more risk to the sector? We remain cautious about the industry's prospects during the next two-to-three years, but we expect the current general stability to persist.”


S&P, Standard & Poor's, North America, Europe, Rating Agency

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