Mold Claims Have Peaked: S&P

By Susanne Sclafane

NU Online News Service, June 20, 2:58 p.m. EST?Mold-related property claims may have peaked in 2001, according toinsurance analysts for Standard & Poor's.

Their views were expressed during a conference call earlier thisweek that included projections that reserve hikes for asbestos,workers' compensation and World Trade Center losses may be on thehorizon in 2002 and beyond.

The good news for personal lines insurers and the bad news forthe commercial and reinsurance sectors came as the analystsdiscussed their 2002 Mid-Year Outlooks, which were first releasedat an S&P Insurance Conference in early June.

While S&P's outlooks for the commercial lines andreinsurance segments are negative, the personal lines sectorcarries a stable outlook from S&P.

Explaining the "less negative," but not yet bullish view ofpersonal lines insurance, Robert Partridge, a managing director,said, "I don't see the prospect of any significant overall ratingsmovements in personal lines during the next 18 months."

"Just as we don't downgrade everybody when times get tough,we're not going to upgrade everybody when times get better,especially during the early portion of a recovery," he added.

During the down cycle, which in S&P's opinion has justended, he said that S&P lowered "a number of ratings" forpersonal lines insurers, including those of State Farm, Farmers andNationwide, while affirming others, such as Allstate and USAA, inspite of the market conditions.

Asked to discuss "toxic mold losses," which were part of thereason for the downgrade of State Farm from "triple A" to"double-A-plus" earlier this year, Mr. Partridge responded: "I'dlike to soft pedal that adjective, ?toxic.'"

"This is a personal lines issue, not a commercial or a liabilityissue," he said, seemingly reserving the term "toxic" forcommercial liability issues only.

"It has not been determined whether or not mold is going toproduce a high volume of losses" that would fall under "the normalliability covers, namely D&O, general liability, workers'compensation, products liability and health care coverages."

While noting that "there is room for [commercial liability]claims to develop, he said, "at this point" mold claims have fallenunder personal lines property covers only?and mainly in Texas.

"We believe that these property claims for mold damages havepeaked," he said. He also said that while the task of workingthrough all the claims reported in 2001 may still be troublesomefor the "biggest insurers" going into 2003 and 2004, losses in 2001were the result of policy defects that are now being repaired withexclusions. In particular, the State Farm policy form "did notexclude the insurer from liability for mold damages from causesthat were chronic," like unrepaired pipes, he said.

Analyst Fred Sklow, among a host of concerns keeping S&P'soutlook negative for the commercial lines sector, cited thepotential for mold as a commercial liability at some point in thefuture.

The main concerns for the commercial and reinsurance sectors,however, were lingering reserve adequacy issues, analysts said.Analysts also expressed the view that while prices are rising inthe two sectors, commercial insurers and reinsurers are stillplaying catch-up after a decade of rate inadequacy, as new issues,like a "ballooning trend" of professional liability losses, presentfurther challenges.

On the personal lines side, Mr. Partridge was more optimisticabout the potential effects of pricing improvements. Noting thatthe best way to measure pricing adequacy is by looking at lossratios, he asserted that loss ratios had gotten better for mostpersonal lines covers in the last year, including automobile bodilyinjury, property damage and collision coverages. Only homeownersgot worse, he said.

"We believe that the trends will continue, except in homeowners,where the [deteriorating] trend will reverse itself," he added. Hesaid he based his belief on homeowners rate filings of thecompanies that S&P rates and the prospect of better weather in2002.

"2001 was third worst year for catastrophes," he said, notingthat a good weather year in 2002 could reduce the homeowners lossratio by 6-7 points overall.

Overall, S&P is estimating that pricing adequacy will reducethe personal auto combined ratio to 103.5 in 2002 from 108.5 in2001, and that homeowners may improve to 112 from a 122 ratio lastyear.

S&P's Outlook Reports are available on the firm's Web siteat www.standardandpoors.com/Forum/RatingsCommentaries/Insurance.