Posted On: January 22, 2007, 9:36 am CST

Posted By: Scot

Hi to Perplexed Again,

Sorry for not getting back to you but was sidetracked Friday afternoon. To answer your questions, I offer the following:

On the topic of not being able to carry forward prior years profits:

Carriers are required to "close" the books (i.e. underwriting profit or loss) annually due to federal tax code. There currently is no provision to allow them to save past year profits and "store" them for the next fiscal year. While one would think this would be a prudent practice to help smooth the peaks and valleys of financial performance, no one in the federal legislature has decided to tackle this needed feature.

With respect to reserving practices:

Each state, through it's appropriate regulatory body establishes the minimum reserving amount and through the National Insurance Commissioners Association, they have unilaterally landed on a 33% reserve amont. This means that for every dollar in premium taken in, 1/3rd has to be set aside in liquidable assets for claims payments.

Loss results, financial reporting and profit taking:

Most insurance companies are stock companies so the profits go back to the stock holders. Mutual Insurance Companies (most of these are life insurance, not property casualty) pay the profits back to their policyholders as there is no stock. The policyholders own the company.

A final thought: States will never give up the right to regulate prices - ultimately we might see federal regulation on the policy language, especially for commercial lines and there are also organizations like AM Best that not only rate carrier's financial status but also provide common policy language which is adopted by many carriers. I met with Hank Greenberg, of AIG fame several years ago and this was his thinking. Regardless of how the industry thinks of Hank, he knew his stuff. I certainly respect him.

Best Regards,

Scot