P-C Insurance Failures Drop To Three-Year Low

NU Online News Service, March 4, 9:56 a.m.EST?The number of U.S. property-casualty insurancefailures in 2003 dropped to its lowest level in three years, helpedby the continued hard-pricing environment and the improvement inthe economy, according to a report by Standard & Poor's RatingsServices.[@@]

The New York-based ratings agency said that in the p-c industry,the number of insurance failures fell to 20 in 2003, compared with28 in 2002 and 24 in 2001.

S&P noted that the p-c carriers made up the majority offailed companies. In total, 28 insurers were put under regulatorysupervision last year, including five insurer failures in thelife-health sector.

The figure demonstrates that the p-c industry?particularly thecommercial-lines sector?still faces challenges, S&P said.

Commenting on p-c commercial lines, S&P warned that itsoutlook on the segment is still "negative" despite three years ofpricing hikes and improving investment performance.

The ratings firm listed a number of risky factors for itscurrent outlook on p-c commercial lines, including reserveshortfalls and reinsurance recoverable issues, as well asconstruction defect claims and silica liabilities. Nevertheless,S&P said the pace of its downgrades in this sector is expectedto slow this year.

The ratings firm explained there are now two distinct trendsdriving the financial strength of the commercial lines sector:improved pricing on current business and the reserve inadequacy forlegacy business, such as asbestos and workers' compensation.

In the first half of 2003, S&P observed, premiums brought inby U.S. p-c insurers exceeded losses and expenses for the firsttime since 1986, and premium volumes for full-year 2003 are set toexceed 2002 by almost 15 percent.

S&P said the improved pricing?also helped by tighter termsand conditions?is leading to significantly better operatingresults. The ratings firm forecasts that the pricing would remainmodestly ahead of claims inflation in 2004 and boost operatingperformance into 2005.

S&P also said supporters of higher pricing can findencouragement from signs of reduced competition, including themerger agreement between St. Paul Cos. Inc. and Travelers PropertyCasualty Corp. to create the second-largest commercial-lines writerin the United States. Furthermore, sales of renewal rights oncurrent business have also lowered the number of players in somelines of business.

Examining investment portfolios, S&P said that when realizedand unrealized capital gains are added, insurers made $16.5 billionin the first half of 2003, compared with a loss of $8.9 billionduring the first half of 2002.

But on the down side, the reserve inadequacy continues to hurtcommercial-lines insurers, S&P said. For some lines, such asworkers' compensation and certain liability lines, payouts on apolicy can be spread over several years or even decades. Althoughasbestos liabilities have proven the most potent menace forinsurers of late, even without them the industry's reserves arestill about $60 billion deficient, according to S&P.

In 2003, there were five workers' compensation companies out oftotal p-c company failures, S&P said. Professional liability,namely directors-and-officers coverage, also caused hefty reservecharges, notably by AIG and Chubb Corp., the two largest players inthat business. Reserving problems are also widespread in themedical-malpractice field, the firm found.

In the personal-lines segment, S&P said U.S. homeowners'insurers are riding "a pricing surge" that will continue to boostoperating performance in 2004. Premium rates in auto coverage,though rising at a slower pace, are also helping to ensure that thepersonal-lines sector as a whole remains on its stable ratingscourse for S&P.

This favorable rate environment, along with the decliningfrequency trend, is having a positive effect on profitability forboth homeowner and auto lines. The ratings firm estimates that thecombined ratio for 2003 in the personal-lines sector was about 103,down from 109 in 2002 and more than 120 in 2001.

For 2004, S&P says there is real potential that pricestrengthening for auto insurance lines over the near term might notsustain 2003 increases. With auto insurers enjoying strongprofitability, competitive pressures are building up. Forhomeowners' lines, S&P says it has noted a decline innon-catastrophe losses; however, homeowner rates are expected tocontinue to rise, driven by rising construction costs and expensivenatural disasters.

S&P also noted that home and auto insurance are highlysusceptible to intervention by state insurance regulators andsometimes by state legislatures. In this respect, the industry hasfound "grounds for both cheer and dismay" last year.

On the positive side, fears about mold liability?once called thenext asbestos?are diminishing, as most states now permit moldexclusions in insurance policies.

In New Jersey, where at least 25 auto insurers stopped doingbusiness in the past decade, legislation was enacted in June 2003which now permits larger and faster rate increases. It also phasesout New Jersey's take-all-comers provision, which had forcedcompanies to write policies for all but the very worst drivers.Companies can also cancel policies obtained through falseinformation.

Several developments were seen as negatives. S&P noted thatthe Texas Department of Insurance, under a law passed in June 2003,imposed premium-rate cuts on 24 homeowners' insurers operating inthe state. In California, the insurance department imposedregulations restricting insurers from selecting customers based ontheir claims history. In addition, bills introduced in theCalifornia legislature would set limits on an insurer's ability tonon-renew policies, require insurers to seek prior approval ofunderwriting criteria, and prohibit use of information from creditchecks. S&P said these examples illustrate the inherentvolatility of doing business in a highly regulated environment.