Taiwan's property and casualty insurance sector is likely to face a tough year in 2002 due to a hardening in the rates offered by the global reinsurance market, Standard & Poor's said in a report yesterday.
The resulting negative impact on the financial strength of the sector raises the possibility that the rating agency may have to lower its ratings on some companies, the report said.
"Subject to a review of each individual company's performance and reinsurance arrangements, rating downgrades are a possibility," said Standard & Poor's associate director, Connie Wong.
Taiwan's property and casualty insurance industry has historically relied heavily on reinsurance, partly due to its high exposure to catastrophic risk events such as earthquakes and typhoons.
However, the availability of reinsurance for the Taiwan market has contracted considerably in recent years as a result of a hardening in the global reinsurance market and a poor underwriting loss performance in the domestic market, especially in the non-motor insurance segment, because of catastrophe-related losses.
Consequently, domestic insurance companies, which do not have a strong underwriting track record, have been paying higher premiums for reduced reinsurance coverage. Weaker companies, which are already susceptible to pressure on their earnings and capital in Taiwan's competitive environment, are likely to find it particularly difficult to confront this continuing challenge, the report said.
While Standard & Poor's has for some time held a negative outlook on the financial strength of the Taiwan property and casualty insurance industry -- given existing pressures with respect to capital, earnings, and reliance on reinsurance -- events over the past year have concentrated these issues.
Continuing sensitivities for the industry include higher retained losses and earnings volatility, and possible gaps in reinsurance coverage or increasingly aggressive reinsurance structuring in the years ahead, which could expose weaknesses in balance sheets. Such sensitivities are partly counterbalanced by the fact that many companies in the sector are generally well capitalized, the report added.
Taiwan's property and casualty insurers need to improve their underwriting management, especially in a market with catastrophic risk exposure but with falling reinsurance support, S&P advised.