US P&C capital cushion could shrink by $80bn

The US property and casualty (P&C) industry’s third quarter surplus is projected to decline as much as $42bn, or 8%, according to Towers Perrin.

If the stock market doesn’t recover from steep losses precipitated in recent weeks by the financial crisis, the surplus decline could approach $80bn, or 15%, by the end of the year, said the company.

Towers Perrin attributes the decline to the clash of equity and credit-related losses on insurer’s asset portfolios, an active hurricane season and an anticipated spike in directors and officers liability (D&O) claims.

The Towers Perrin survey also found that commercial insurance prices had declined about 5% in the first half or 2008, on top of similar declines in each of the prior two years.

Stephen Lowe, managing director of Towers Perrin's global Property & Casualty Insurance practice, said: ‘The current situation will cause price levels to stabilize if not increase. While losses are widespread, we aren’t expecting any company failures; however, some downgrades from the rating agencies are likely.’

Lowe called it a ‘wake-up call’ and added: ‘Risk management is now more than ever an imperative.'

'Buyers of commercial insurance will need to pay more attention to insurance purchasing decisions, and consider contingencies in renewal planning,’ he said.

‘The focus will now be on the quality of security offered by insurers.’

Statutory surplus is reported quarterly by US based regulated insurance companies. It is a conservative measure of the capital cushion held by insurers to protect policyholders in the event of adverse results.