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Three Questions: Thomas Upton

Three Questions: Thomas Upton

While the 2006 hurricane season has not lived up to the worst fears of most in the insurance industry, considerable issues remain before property/casualty insurers and reinsurers. Among those keeping the sharpest watch on those issues and their potential impact on P/C companies are the ratings agencies. Recently, Thomas Upton, managing director and head of the property/casualty practice at Standard & Poor's Corp. in New York, talked about some of the key issues facing the P/C industry.

Q: In general, what are some of the issues S&P is looking at right now that could potentially have an impact on property/casualty companies' ratings?

A: In the property/casualty area, well, I would say we're looking less frenetically this year than we were a year ago at this time.

There remains concern longer term whether the frequency of major catastrophic events will be increasing, whether that's been factored into the pricing and underwriting of insurance companies. Concern, too, that the favorable pricing trends that we see in property lines as a result of problems of the past couple years, whether pricing might soften as a result of this year's limited number of hurricanes.

Right now in casualty lines and even some property lines there is some price softening. It remains to be seen whether that continues and whether it extends into softening of terms and conditions. That's something you have to ask yourself. There's been no evidence of that at this point, particularly in the cat-prone areas. I can only cite the consensus that I've heard in the industry, which is at least through Jan. 1 renewals pricing will hold firm.

Q: About a year ago, S&P indicated that it was going to be taking a formalized approach to examining insurers' enterprise risk management programs as part of its ratings analysis. What have you found in looking at insurers' ERM programs? How well are insurers doing at adopting ERM?

A: The way we assess them, we have four categories of assessment. At the bottom is weak, then it proceeds up to adequate, then up to strong and then, excellent. The overwhelming majority thus far have been judged to be adequate. Of course that covers a wide range from those who are barely adequate to those moving to strong status.

In general I would say property/casualty companies are very good at managing their underwriting risks. Where you tend to have some property/casualty companies fall short relative to life companies is in melding risks on the underwriting side of the balance sheet with those on the investment side of the balance sheet.

Q: The future of TRIA remains uncertain. How big an issue is some resolution of the terrorism reinsurance backstop issue for P/C companies in S&P's view?

A: I think that's something the industry's going to have to come to grips with this year--the industry and governmental authorities.

I think most people agree, though, it's by no means unanimous, that an NBCR (nuclear, biological, chemical or radiological) event could have potential losses so large, so random, that it would be difficult to underwrite. So I think there will be some controversy about that going forward for the rest of the year.