Much like how the devastation of the Deepwater Horizon calamity will be felt for years to come, the disastrous effects of the financial crisis continue to lap against the shores of the property/casualty industry.
In the aftermath of the economic meltdown, P&C insurers have turned to releasing significant amounts of reserves to buoy their position despite the deterioration of underlying business conditions. But this likely needs to change, says
Weak economic recovery prospects, shaky consumer confidence stemming from high unemployment and a prolonged soft underwriting cycle will make it difficult for the U.S. P&C insurance industry to sustain its historical operating profitability, the rating agency posits. Along with this, lower revenue income from a decline in payrolls and sales, excess capacity in the industry, continuing price declines and reduced net investment income resulting from low investment yields are going to weaken insurers' operating profitability in the years ahead.
"We now believe that after years of large reserve releases from recent accident years, companies likely won't be able to continue at this pace," says Standard & Poor's credit analyst Siddhartha Ghosh.
Furthermore, S&P believes that as the current soft market cycle continues, some P&C insurers could upwardly revise their prior-year reserve estimates, especially for some of the longer-tail lines.
"We continue to elevate our independent analysis of loss reserve adequacy for P/C insurers based on our current criteria and advanced tools," Ghosh says. "If we find that a P&C insurer's required reserves are inadequate, we might adjust the company's reserve adequacy, earnings, or capital adequacy. In some cases, this could, based on materiality, result in rating actions."
