The US general insurance market resembles a gladiatorial contest between pricing and payouts, according to a new report from Standard & Poor’s (S&P). It says that as long as reserving woes continue to dominate the US market, the overall ratings outlook remains negative.

“Improved pricing is kicking in, helped by tighter terms and conditions, and that’s leading to significantly better operating results,” insurance ratings analyst Mark Puccia said in New York as the ratings agency’s annual insurance conference kicked off. He expects pricing to remain “modestly ahead” of claims inflation through 2004 and to boost operating performance into 2005.

But before higher premiums can make an impact on ratings, there is a deep hole to fill in insurers’ reserves. The use of current income to top up reserve deficits reached unprecedented dimensions in the fourth quarter of 2002, with asbestos exposures underlying the largest adjustments and prompting a slew of downgrades, S&P said.

But even the estimated $17.5 billion additions to reserves last year don’t fix the problem. “Some companies have still not come out cleanly and told the world their level of under-reserving,” analyst Sid Ghosh said.

The shortfalls are most evident in workers’ compensation, directors' and officers' liability and medical malpractice cover. The analysis also notes with alarm that gross reserve additions cited by insurers can be far higher than the net additions they actually budget for, based on the assumption that reinsurers will make up the difference.