New Reports Prescribe Remedies for Ailing Market

Three new reports published recently provide a sizeable assortment of diagnoses, prognoses, and remedies for increasingly volatile commercial insurance markets. When viewed as a compiled list of problems and solutions, one can safely assume the industry has its work cut out for it in order to keep viable.

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

The Council’s quarterly market index displayed 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.

According to Council president Ken Crerar, the newest index survey paints a familiar picture: increasing rates, more stringent terms, and shrinking capacity. However, Crerar noted that solvency concerns hadn’t cropped up until now. Larger brokers contend state regulators aren’t capable of tackling solvency issues in time to salvage unstable insurers—but due to the lack of any federal regulations, those are the only watchdog mechanisms in place.

Every single line of commercial insurance experienced premium increases during the third quarter; most rate increases fell between 10 and 30 percent. According to survey respondents, 20 percent of construction risks, 18 percent of the director’s and officer’s accounts, and 27 percent of umbrella policies grew by between 30 to 50 percent. Medical malpractice liability coverage rates increased dramatically—18 percent of that cover’s premiums jumped between 30 and 50 percent, another 12 percent increased by between 50 and 100 percent, and yet another 19 percent of med-mal rates grew by more than 100 percent.

The Council survey also indicated growing utilization of alternative markets, including captives and surplus lines, by brokers and agents to find coverages for high-risk or difficult clients.

Sophistication essential
In October, Standard & Poor’s made 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, and affected by, cycles would ultimately prove more stable. Without a concerted effort to reduce the market’s susceptibility to traditional business cycles, insurers’ financial strength ratings will likely maintain and expand their downward trend. Dinesen pointed out that nearly half of all ratings are now on negative outlook or CreditWatch negative.

Dinesen noted the fact that insurers are now beginning to take non-underwriting risks into account and are using more advanced modeling systems—indicating that the market is becoming more sophisticated. Nevertheless, further steps need to be taken, with the market in want of greater sophistication in terms of pricing, its use of risk indicators, and in its relationships both as clients and as risk carriers.

The analyst also 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 insures must also eliminate relationships, long-standing or otherwise, that have proved unprofitable.

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

Commenting on the study, S&P’s director Mark Puccia noted that many insurers examined are not paying heed to evidence of deficiencies in their prior years’ reserves.

According to S&P’s, 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 these minor, non-material adjustments into solvency-threatening events.

Topics Carriers Agencies