Towers Perrin: P-C Surplus Could Drop $42B In 3Q

The U.S. property-casualty industry’s third quarter statutory surplus is projected to decline as much as $42 billion, or 8 percent, from the beginning of the year, a consulting firm estimated.

Towers Perrin said the fall of comes because insurers have been hit by equity and credit-related losses on asset portfolios, hurricane catastrophe losses and a spike in directors and officers liability claims.

Additionally, if the stock market fails to recover from steep losses precipitated in recent weeks by the financial crisis gripping the United States and the world, Towers Perrin said surplus decline could approach $80 billion, or 15 percent, by the end of the year.

Statutory surplus, reported quarterly by U.S.-based regulated insurers, is a conservative measure of 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.

“Buyers of commercial insurance will need to pay more attention to insurance purchasing decisions, and consider contingencies in renewal planning,” said Stephen Lowe, managing director of Towers Perrin’s global Property & Casualty Insurance practice. “The focus will now be on the quality of security offered by insurers.”

He added that buyers also will 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 observed.

Among the 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 directors and officers’ liability claims and a general deterioration in price adequacy.

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

• Thirty billion dollars of realized and unrealized losses on investments in third quarter 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.

“The most recent findings from Towers Perrin’s 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,” Mr. Lowe noted. “The current situation will cause price levels to stabilize if not increase.”

He said that while losses are widespread, “we aren’t expecting any company failures; however, some downgrades from the rating agencies are likely.”

He added that this is a “wake-up call for all companies. Risk management is now more than ever an imperative. Recent failures are examples of failures in risk management, not of risk management.”

Mr. Lowe said that the magnitude of the 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.”