S&P’s Report Says Asbestos Driving Rift Between Insurers/Reinsurers

Asbestos exposure foreshadows a growing rift between insurers and the reinsurance companies that back them, according to a new report by Standard & Poor’s.

“Disputes between insurers and reinsurers appear to be intensifying,” commented Steve Dreyer, managing director. “The tone is getting ugly.”

He argues that the reinsurance community as a whole has not stepped up to shoulder the asbestos burden apparently expected of it, following massive increases in the reserves put up by leading property/casualty players for future payouts.

When, for instance, an insurer like ACE Ltd. announces a $2.2 billion addition to gross reserves for asbestos, as it did in Jan. 2003, but only a $500 million boost to net reserves (after expected reinsurance has kicked in), it reportedly signals an overweening dependence on reinsurance for an exposure representing about 30 percent of ACE’s capital base.

“Across the industry, the difference between net and gross numbers raises all sorts of questions about who’s ceding what to whom,” said John Iten, director. “It’s smoke and mirrors. The liabilities are disappearing into thin air, and nobody’s capturing them.”

Anticipated asbestos claims have prompted dizzying reserve increases at a number of other U.S. insurers in the past year or two, with Travelers Property Casualty Corp. topping the list at $2.5 billion (fourth-quarter 2002), equivalent to almost all of its 2002 operating earnings.

Several other prominent players have stepped up with reserve additions of about $1 billion, sometimes accompanied or even anticipated by Standard & Poor’s.

But reinsurers have not reportedly matched these exposures with commensurate increases in their own reserves, in part because of a natural lag in the process, but also because insurers are often failing to inform them about what level of reimbursement they are expected to come up with, even though the primary companies have built that anticipated income into their own numbers.

Entitled “Asbestos Driving a Wedge Between Insurers and Reinsurers,” the report also details the industry’s struggle to capture aggregate exposures, along with recent developments on the litigation and legislation fronts. It is available to RatingsDirect subscribers at www.ratingsdirect.com.