OLDWICK, N.J.—Although the U.S. property/casualty insurance industry's risk-adjusted capitalization declined 17 percentage points in 2008, the industry remains adequately capitalized to support its asset, credit and underwriting risks, according to a new A.M. Best report.
The Oldwick, N.J.-based ratings agency attributed the capital decline to the compound effects of the financial crisis, the fourth-highest year on record for U.S. catastrophe-related losses and very challenging market conditions.
As a result, the industry reported its first underwriting loss since 2005, investment losses that significantly impacted balance sheets and a near-$60 billion drop in policyholders' surplus, it said.
However, excess capital the industry built up from several consecutive years of surplus reserves “effectively cushioned” the reduction. Accordingly, the industry's median risk-adjusted capital levels at year-end 2008 remained well above the typical guidelines for A.M. Best's highest rating level, Best said.
The ratings agency measures the risk-adjusted capitalization for each insurer using its proprietary capital model, Best’s Capital Adequacy Ratio, or BCAR. An insurer’s BCAR score is expressed as a ratio of its adjusted surplus to its risk-adjusted required capital.
The industry's median BCAR score in 2008 was 228.2, down from 244.9 in 2007. The typical BCAR guideline for an A++ rated insurer is 175.0
Copies of Best's report, which is available at no cost to subscribers and for purchase by nonsubscribers, can be found on its Web site at www.ambest.com.
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