New Reports Prescribe Remedies for Ailing Insurance Markets

Three recently published reports provide a sizeable assortment of diagnoses, prognoses and remedies for increasingly volatile commercial insurance markets.

3Q Commercial Market Index
The Council of Insurance Agents & Brokers’ third quarter 2002 Commercial Insurance Market Index, included a survey of the council’s members, 86 percent of which reported major concerns about solvency of carriers. Terrorist attacks, poor stock market performance, and growing asbestos and other environmental hazard claims were cited as primary factors threatening carrier stability.

The market index showed increases in premium prices for all commercial business lines through Sept. 30. Member brokers belonging to the sector writing 80 percent of commercial coverage, indicated that more than 60 percent of medium and large accounts saw price hikes between 20 and 50 percent; premiums increased 10 to 20 percent for half the brokers’ smaller accounts, while another 20 percent of those accounts experienced rate increases between 20 and 30 percent.

Rates increased in all lines of commercial insurance in the third quarter; most increases fell between 10 and 30 percent. In highly unstable lines, such as medical malpractice liability, rates increased as much as 100 percent or more in some cases.

The survey indicated growing utilization of alternative markets, including captives and surplus lines, by brokers and agents to find coverages for high-risk or difficult clients. In addition, results showed that clients are reacting to rate increases by opting for higher deductibles or self-insuring some of their risks. Brokers also reported that some clients are doing without commercial coverage altogether.

Sophistication essential
Standard & Poor’s released a statement emphasizing the increasing sophistication of the insurance industry as a potential path to more stable profitability. According to S&P’s credit analyst Christian Dinesen, insurance markets less dependent on, cycles would ultimately prove more stable. Without a concerted effort to reduce cyclicality, insurers’ financial strength ratings will likely maintain and expand their downward trend. Nearly half of all ratings are now on negative outlook or CreditWatch negative.

Dinesen cited the need to get beyond the current situation, in which financial strength ratings of only “A-” or above are deemed acceptable, while everything else is considered negative. Instead, markets should eventually use rating scale granularities to apply to any book of business, which would facilitate more sophisticated pricing. More rigid scrutiny of underwriting results, heralded initially by nine $1 billion catastrophes in 1999, is a good first step, but insurers must also eliminate relationships, long-standing or otherwise, that have proved unprofitable.

Dinesen believes it will not be impossible to initiate such fundamental change. Nevertheless, he remained skeptical as to whether the market will stay committed to change.

Growing loss reserves
A recently published study by S&P, “Focus on Accounting: Insurers’ Loss Reserves Scrutinized,” analyzed the loss reserves of the 25 largest U.S. property/casualty insurers. It found that, based on third quarter balance sheets, 56 percent of the companies had reserve deficiencies greater than 5 percent of total net reserves—which the rating agency deems materially significant.

In addition, many insurers examined are not paying heed to evidence of deficiencies in their prior years’ reserves.

According to S&P, non-material misstatements of reserves are unavoidable, and occur in the normal course of a property/ casualty insurer’s business. However, unexpected changes in the business environment or willful management manipulation of the reserves can turn minor, non-material adjustments into solvency-threatening events. Recent disclosures by some of the U.S. insurance industry’s larger players that prior-year reserves were inadequate and needed to be restated highlight that this problem continues to threaten the credibility of many companies.