Oxford Metrica has released a report highlighting re/insurer creditworthiness.
The issue of re/insurer security has been brought to the fore by the continuing problems of long-tail liabilities and associated reserving questions. Exposures such as asbestos-related disease, employers' liability in the UK, environmental impairment liability, medical malpractice, and, more recently, toxic mould, are all putting pressure on re/insurers. In all these classes - and other areas of liability such as directors' and officers' - claims frequency and severity continue on the increase.
The impact on re/insurers' reserves is "considerable", according to Oxford Metrica, as well as their long-term ability to pay claims. This has been further compounded by poor investment performance.
Several prominent reinsurers have strengthened their reserves to cope with the onslaught. AIG announced a $1.8bn after-tax net increase in reserves in February 2003 to deal mainly with excess workers' compensation, D&O and healthcare. Travelers increased asbestos reserves by $1.3bn after tax in January 2003. According to Oxford Metrica, Travelers now has the largest reserves for asbestos claims. Travelers and ACE have both tripled their asbestos reserves since the end of 2001, while Chubb and Royal & SunAlliance have doubled theirs. Other substantial increases have been made by Allianz, CNA Financial and Munich Re. Such moves are expected to continue during 2003 across the industry.
Long-tail liability has already taken its fair share of victims within the re/insurance sector, with companies such as Copenhagen Re, General Re, Overseas Partners, Royal Re, Scandinavian Re and The St Paul Companies all entering run-off for their liability lines - and in some cases shutting up shop altogether. SCOR has shaved its long-tail book, while ING has stopped writing it in five of its insurance subsidiaries. According to Oxford Metrica, a number of insurers are purchasing retroactive reinsurance to remove long-tail liabilities from their balance sheets.
The ratings agencies are increasingly looking at long-tail and latent liabilities as an important element in their decisions on the companies they survey.
Table 1 shows the ratings of the top 25 global re/insurers (by market capitalisation) on 21 June 2003, and identifies rating actions since the beginning of the year. During the period, there were 16 downgrades and no upgrades, compared with 42 downgrades and ten upgrades between 11 September 2001 and
31 January 2003. "Clearly," said Oxford Metrica, "the downward trend of rating action has yet to stabilise." Geographically, it is the German market which has fared worst in recent times, with Munich Re, Hannover Re and Allianz receiving nine of the 16 downgrades recorded.
Both Munich Re and Swiss Re have lost their coveted AAA ratings, while Employers Re was downgraded by S&P in May 2002, when the rating agency changed its methodology. Two months later, S&P pushed Allianz down from AAA to AA+ on its purchase of Dresdner Bank, leaving just AIG and Berkshire Hathaway as the only AAA-rated carriers in town. This should be highly advantageous to them. "As liability claims continue to soar, strong ratings become increasingly scarce and deservedly attract higher premium rates in reflection of firms' greater ability to pay claims in the long term," commented Oxford Metrica.
The failure of the rating agencies to notice the shenanigans at Independent Insurance - the A-rated right up to the day it was shut down - does not go unremarked by Oxford Metrica. And smaller, newer re/insurers may be finding themselves penalised by the rating agencies because of their limited history and not having their absence of long-tail exposures fully recognised.
Nevertheless, it is vital that corporate insurance buyers take a good look at their risk carriers' creditworthiness as well as their competitiveness. "The current market also offers an excellent opportunity for insurance brokers to demonstrate their value," said the report. "The choice for corporate insurance buyers should not reduce simply to one of cost comparisons."