Fitch Reports P/C Insurers’ Credit Exposure from Reinsurance Increases; Disputes Grow but Stay Small Relative to Surplus

U.S.-based insurers’ reinsurance credit exposures have increased significantly during a period in which the credit quality of the reinsurance industry has deteriorated, according to a new research report published by Fitch Ratings.

“Insurers have greatly increased their exposure to reinsurance, primarily because the industry took advantage of soft reinsurance market pricing in the late 1990s,” said Mark Rouck, director, Fitch Ratings.

“At the same time, the credit quality of the reinsurance industry has declined significantly as many reinsurers experienced adverse reserve development, poor underwriting results, and sizeable investment losses.”

U.S. based insurers’ net reinsurance recoverables totaled $171 billion at year-end 2002 and grew at a 12.2% compound annual growth rate between year-end 1998 and year-end 2002. In contrast, total assets excluding reinsurance recoverables grew at only a 0.8% rate and policyholders’ surplus declined at a 3.7% rate over the same time.

The new report also highlights a shift in recoverables toward non-U.S. based and unauthorized reinsurers and examines collection and collateralization trends impacting the industry.

“Reinsurance recoverables are being collected more rapidly due to heightened collection diligence on the part of ceding companies,” said Rouck, and “even though reported reinsurance recoverables in dispute are on the rise, they remain very small relative to total recoverables and relative to surplus.” Rouck also commented that the overall collateral levels remain high, and that while some worrisome trends regarding the form of collateral exist, the credit-quality of the collateral is generally good.

The new report ‘Reinsurance Credit Trends: A Mixed Bag’ can be found on the Fitch Web site ‘www.fitchratings.com’ by linking to the ‘Insurance’ sector and clicking on ‘Special Reports’.