Fitch: Capital Buffers May Protect Life Insurers

By Arthur D. Postal

October 16, 2008 at 11:56 AM

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Fitch Ratings says it may reduce the ratings of a number of insurers and reinsurers in coming weeks as a result of the current economic turmoil.

Rating cuts triggered by writedowns of investments could affect the life, health, title and property-casualty sectors in the United States, as well as the life and property-casualty in France, Germany, Italy, Switzerland and the United Kingdom, according to analysts at Fitch, London.

"Fitch believes liquidity could become pressured for some life insurance companies, as well as some reinsurance companies, especially if they experience declines in their credit profiles that lead to erosions in market confidence," the analysts write.

But Fitch believes "life insurers will be able to cope because, prior to the current rolling instability in worldwide financial markets, many life insurers had built up significant capital buffers, following a period of favorable investment market conditions," the analysts said.

Reinsurers could be more vulnerable, because many of them depend on bank letters of credit, and many banks require reinsurers to post additional collateral when financial strength ratings fall below a specified level, the analysts write.

In addition, "some reinsurance contracts contain cancellation or recapture provisions also tied to ratings triggers that could cause the reinsurer to fund the return of a portion of premiums to the ceding company in unwinding a contract," the analysts write.

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