Morgan Stanley warns reinsurers are under-reserved

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Many of the world's reinsurance companies are set to go bust due to inadequate reserves, says an analysis by the US investment bank Morgan Stanley.

The dim assessment implies that the under-reserving which contributed to the collapse of Independent Insurance is more widespread in the industry than previously thought. Reinsurance companies provide cover to mainstream insurance groups and, from the mid-1990s, they have enjoyed bumper returns on their capital amid booming global stock markets.

Espen Nordhus, an insurance analyst at Morgan Stanley, said large and small players reduced premiums during the second half of the decade, leaving them with inadequate reserves as the world entered a more risky period. Under-reserving is thought to be one reason behind the failure of Independent Insurance, the general insurer being investigated by the Serious Fraud Office.

Mr Nordhus said: "There will be more such failures, not because of fraud, but because the downturn in capital markets has been much worse than expected while the cost of losses has inflated." While larger, listed reinsurance groups were likely to be able to obtain fresh funds from their shareholders, smaller groups would go to the wall. He said: "If a reinsurer goes bust, it is the primary insurers who are left with the bill."

In the US, the problem was exemplified in asbestos-related claims being under-reserved by as much as $20bn (£13bn). The US compensation culture was spreading to Europe, he added.

Separately, Standard & Poor's, the ratings service, said European reinsurers risked being downgraded following losses from storms and tumbling equity markets.