Is that the (A.M.) Best Advice You Can Offer?

Last Updated Jan 6, 2010 12:48 PM EST

Rating agency A.M. Best Co. is about as close to a bible as you'll find in the insurance industry. It sticks with its core strength - assessing insurers' ability to pay claims - and thus far has avoided the pitfalls and pratfalls of other raters such as Standard & Poor's and Moody's Investors Service, which have embarrassed themselves with bad calls.

So when A.M. Best speaks, the industry listens. But it shouldn't necessarily obey, particularly with recent reports like, "Changes in Investment Climate Turn Focus to Underwriting," which offers mostly the conventional wisdom and then improbable advice.

The conventional wisdom: investment returns for property casualty insurers are down. Yes, they are down for virtually anyone with a bank account. Life insurers certainly know this, which is why they chose Pimco for a makeover to make them look $5 billion better.

A.M. Best says the good news is that P&C insurers, by virtue of the fact they have to pay claims, have been even more conservative, tucking their assets into short-term investments and Treasuries. The problem: those assets have lower yields.

Now here's the advice. "To the extent that insurers anticipate lower yields from investments, they must ... act to maintain returns by looking to improve underwriting results."

Somewhere in the bowels of its report A.M. Best may offer tips on how to "improve underwriting," but it isn't clear from the publicity surrounding the report. In fact, A.M. Best admits that the industry will face "challenges" from the increasingly competitive P&C market and the recession.

The word "challenges" is mild in comparison to what the industry is now facing.

  • Insurance brokers are eating each other's lunch in an effort to improve the bottom line.
  • American International Group's Chartis unit, with taxpayer money in hand, is skewing the market downward, according to other insurers.
  • MarketScout says property casualty rates in December dropped four percent year over year.
  • And Business Insurance reports that three reinsurance brokers, Willis Re of Willis Group Holdings, Guy Carpenter of Marsh & McLennan, and Aon Benfield of Aon Corp., all report that reinsurance rates are soft.
Perhaps A.M. Best, which put its finger on the problem, can also find the solution. But we haven't seen it yet.
  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.