Despite booming profits, US insurers have been warned of a new hazard they have to deal with – the threat of reinsurance bad debts. The insurers should be nervous about the ability of reinsurers to pay for rising claims on asbestos and other liabilities, says Standard & Poor’s (S&P), which is warning of “escalating tensions” between insurers and reinsurers.

The ratings agency notes in a new report from New York that insurers may be fooling themselves with their generally held assumption that only 10% of the $257 billion in reinsurance recoverables will become bad debt. S&P believe the amount of bad debt may be considerably higher.

As evidence, S&P points to the decision last year by Liberty Mutual to raise its provision for bad debts on asbestos reinsurance receivables to 55%. And it says US insurers are now increasingly demanding that reinsurers provide collateral if their ratings fall below acceptable levels. Some insurers are even insisting on clauses allowing cancellation of the reinsurance contract if reinsurers’ ratings fall too far.

US insurance publication Business Insurance quoted S&P analyst Laline Carvalho warning that the days have gone where insurers and reinsurers would work together. “The old saying that an insurer has a bank with its reinsurer no longer applies.”