Towers Perrin Sees P/C Insurer Surplus Decline of 8% for Q3

October 22, 2008

The U.S. property/ casualty industry’s reported statutory surplus at the end of the third quarter is projected to decline as much as $42 billion, or 8 percent, from the beginning of the year, according to estimates from the professional services firm Towers Perrin.

Towers Perrin blamed equity and credit-related losses on insurers’ asset portfolios, catastrophe losses resulting from an active hurricane season and an anticipated spike in directors and officers liability (D&O) claims for the decline.

Additionally, if the stock market doesn’t recover from steep losses precipitated in recent weeks, the surplus decline could approach $80 billion, or 15 percent, by the end of the year, the company said.

Poor underwriting results, coupled with declining investment income, will contribute to a projected overall third-quarter industry net loss of $4.8 billion, the analysts said.

Towers Perrin analysts said that while losses are widespread, commercial insurers are not expected to fail.

Statutory surplus, reported quarterly by U.S.-based regulated insurance companies, measures the capital cushion held by insurers to protect policyholders in the event of adverse results. Industry-wide figures are compiled and published by various industry trade associations.

The third quarter results have implications for commercial insureds, accoroding to Stephen Lowe, managing director of Towers Perrin’s global Property & Casualty Insurance practice.

“Buyers of commercial insurance will need to pay more attention to insurance purchasing decisions, and consider contingencies in renewal planning,” Lowe said. “The focus will now be on the quality of security offered by insurers.”

Lowe said buyers will also need to include insured claim liabilities in their overall management of counterparty risk. “Since the capability to estimate gross liabilities — rather than just net retained liabilities– is essential to measuring counterparty exposure, some companies may want to develop or refine these estimates,” he said.

Among the other industry findings reported by Towers Perrin:

The projected industry combined ratio for the third quarter is 116.6 percent, producing an underwriting loss of $18.5 billion. Contributing factors are large catastrophe losses, continuing heavy claims for the mortgage and financial guaranty specialty insurers, emerging D&O claims and a general deterioration in price adequacy.

About $30 billion of realized and unrealized losses on investments in Q3 statutory filings are plausible; write-offs due to investments in failed financial institutions could be in the range of 0.5 percent of invested assets.

Towers Perrin’s most recent quarterly commercial lines insurance pricing and profitability trends (CLIPS) survey indicate that commercial insurance prices declined about 5 percent in the first half or 2008, on top of similar declines in each of the prior two years. “The current situation will cause price levels to stabilize if not increase. While losses are widespread, we aren’t expecting any company failures; however, some downgrades from the rating agencies are likely,” Lowe said.

“This is, however, a wake-up call for all companies,” Lowe added. “Risk management is now more than ever an imperative. Recent failures are examples of failures in risk management, not of risk management. And the magnitude of these failures makes the need for a strong risk culture, deployment of tools to support risk-based decision making, clearly stated risk appetites, and current economic capital measurement paramount.”

Source: Towers Perrin

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