Study: Commercial Insurance Reserves Deficient by $13-$20 Billion

June 11, 2003

The commercial insurance industry’s reserves from 1997 to 2001 are deficient by $13 billion to $20 billion, according to a study released by the investment banking firm Cochran, Caronia & Co.

The deficiency equates to 10 to 15 percent of commercial line surplus and represents virtually all of commercial insurance earnings for 2002, according to the report, authored by Adam Klauber.

The commercial insurance industry is depleting its cushion against previous loses and may be forced to fund prior claim payments with future earnings, Klauber writes.

These reserve deficiencies will reduce commercial line property profitability by five to 10 percent annually for the next 5 to 10 years.

Klauber also writes that intense pressure for higher reserves will force weaker commercial insurers to become more aggressive in obtaining a larger part of market share and thus soften the competitive environment.

Klauber adds that paid to incurred ratios for the 1998 to 2000 accident years are materially higher than historic averages by 3 to 8 percent. This signals that greater than expected claim activity
from prior years is causing claim payments to outpace reserves.

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