The Best’s Commentary, titled, “GE’s Long-Term Care Exposure Magnifies Counterparty Risk for Several Insurers,” notes that
Recently, a forensic accountant sounded the alarm that more increases may be necessary for the company’s LTC block. This LTC exposure rests specifically with two
The report notes that there has been a steady increase in claims and unfavorable experience in the LTC segment overall, as well as a continuous growth in reserves, which has placed continued pressure on many carriers’ capital and earnings. The only alternative for LTC writers who want to shrink their existing exposures and reinsure their business is to go to lower or non-rated reinsurers, bringing its own risks, specifically, counterparty risk.
LTC accounts for more than half the
ERAC’s LTC book has been historically volatile and unprofitable relative to original actuarial expectations.
AM Best will continue to monitor how this situation unfolds, and notes that, to limit counterparty credit risk exposure, strong counterparty due diligence on the part of cedents is critical, which is generally within the realm of strong enterprise risk management. Counterparty diversification, the use of collateral and ratings triggers can help mitigate the effects of a potential reinsurer’s insolvency.
To access a copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=289174.
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Source: AM Best