Three Questions: Thomas S. Upton, Standard & Poor's Corp.

During this week’s PCI conference, Thomas S. Upton, managing director at Standard & Poor’s Corp. in New York, discussed some of S&P’s views on the property/casualty sector with Business Insurance Special Projects Editor Rodd Zolkos.

Q: In general, what’s S&P’s current outlook for the property/casualty sector?

We have published outlooks on three different sectors within property casualty: personal lines domestic business, domestic commercial lines business and then reinsurance on a global basis. And we have negative outlooks on both the personal lines and the commercial lines right now, stable on the reinsurance.

Basically, the reason for the negative outlooks on both personal and commercial lines—particularly the latter—is concern about continued deterioration of pricing. From all the statistics we’ve seen and people we’ve spoken to, we believe there has been a slowing in the rate of decline over the past several months, but nevertheless, the decline is probably still going on at that slower rate.

Q: Can that industry outlook change absent a major event?

We see some reason to believe that there could be a gradual leveling out and a gradual increase at some point in the future as the economy recovers, born of improved pricing discipline by companies generally, better risk management by companies and other features such as diminished interest rates, which should eliminate any inclination to cash flow underwriting, and continuous holding up of reinsurance pricing, which diminishes the potential for ceding risk that is taken on.

So we think that there is a basis for a leveling out and a gradual increase at some point in the future. Not everything has to be a crisis.

Q: S&P has analyzed companies’ enterprise risk management efforts in its rating process for several years now. What is the status of ERM in the property/casualty industry?

Broadly I’d say that companies have really taken this to heart and tried to develop the governance and the models and the systems necessary to really pursue management on a global basis within an organization. We think that has probably been embraced more readily and a bit more effectively at reinsurers than primary insurers at this point. I think this might be part of the reason why reinsurance pricing has held up a little bit more firmly than pricing at the primary level.

We don’t believe that the embrace has been universal by any means. For example, looking at the financial market turbulence of the last year or so, we did not, to the best of my recollection, lower any ratings in the property/casualty universe because of asset issues at companies or because of capital losses that had been taken as a result of asset issues.

However, we did take a couple of rating actions on companies where the asset losses exceeded risk tolerances. And the actions were taken on the basis of perceived deficiencies in risk management rather than for the pure, absolute loss of capital that was endured.