Searching For Profits In Products Liability

The insurance industry net calendar-year combined ratio forproducts liability was 174 in 2004, and 198 on average for the lastsix years--the worst results for any property-casualty insuranceline analyzed on a comparable basis.

Yet, the products liability market is competitive, andparticipants report that the line has been profitable.

Should insurers sue the manufacturers of the lenses they'relooking through when they analyze summaries of underwriting losseslike these? Are they seeing something different?

In fact, supplemental analyses of the line, using different cutsof data from National Underwriter Insurance Data Services, showresults that have improved markedly. These analyses attempt toremove the impact of prior-year exposures from asbestos and otherissues, revealing that results for products liability policieswritten in recent years are comparable to overall industry resultsfor all lines of business--not much better, but certainly not theworst.

The chart on page 13, like summaries presented for other linesin our "Data Insights" series, shows two years of calendar-yearloss ratios (direct and net) and net combined ratios based oninformation for the Insurance Expense Exhibits of insurers annualstatements.

The fact that the 2004 net combined ratio for the industry of174 is so much higher than that for the top 10 companies--142--isthe first clue that the analysis of products liability is notstraightforward.

Part of the discrepancy is explained by results for one insurerthat is not included in the chart--Allstate, which stopped writingcommercial lines like products a decade ago. With no premiums inrecent years but loss reserve changes of more than $300 million in2004 for its discontinued products line, Allstate added 32 pointsto industrywide loss and combined ratios for productsliability.

But even current writers have old-year exposures from asbestosand other issues impacting their calendar-year loss and combinedratios--which, by definition, capture reserve changes from prioraccident years. While insurers individually report asbestosexposures in an annual statement footnote--Note 33--they do notprovide this information by line so that products liability resultsadjusted to exclude the distortion of asbestos charges can beeasily derived.

Claus Metzner, a consulting actuary for Milliman in Milwaukeewho specializes in the analysis of asbestos reserves, responded toa recent NU inquiry, speculating that while non-products asbestoslosses have increased in recent years, roughly two-thirds of theexposure is in the products line in recent calendar years.

Armed with this information, NU did a quick calculation usingNote 33 information for one of the largest products liabilityinsurers--St. Paul Travelers. Eliminating two-thirds of theinsurer's calendar-year incurred loss and loss adjustment expensesfor asbestos in 2004 from industrywide figures drops the combinedratio another 21 points.

While a 121 combined ratio (minus Allstate and St. PaulTraveler's asbestos losses) is still nothing to cheer about,similar adjustments for other companies would likely reduce theratio further. In fact, two alternative analyses based on morereadily available information get us closer to a profit story forproducts liability.

The first compares calendar-year pure loss ratios for insurerswriting occurrence-based policies with those writing claims-madepolicies--policies with coverage terms that respond to recentexposures and not prior acts. (Refer to Charts 1 and 2 with thisarticle.) While the volume of business for claims-made insurers ismuch smaller, the results are clearly better, with nearly 100points separating six-year average loss ratios for the twogroups.

The difference, however, is not fully explained by the policyforms. Specialty insurers dominate the claims-made group, and inboth groups specialists outperform standard carriers.

Our final chart shows loss and loss adjustment expense ratiosfor products liability on an accident-year basis, which matcheslosses with the years in which they occurred. The ratios, compiledfrom Schedule P of insurer annual statements, have clearly improvedover the past six years, with a 2004 ratio for the largestgroups--65.6--that is less than half the ratio for 1999--132.9.

This last analysis assumes insurers have correctly estimatedloss reserves for recent years--a difficult task because theseyears are not mature. Still, the products liability loss and lossadjustment expense ratio for 2004 for the largest insurers averaged0.7 points better than the comparable ratio for all linescombined--66.3 for the same group of insurers.

Data used for the analysis prepared by NU's editorial staff isthe NAIC Annual Statement Database via National UnderwriterInsurance Data Services/ Highline Media. For information, contactChris Rogers at 617-441-5976.

Flag: Chart 1

Head: Loss Nightmare

Products Liability Occurrence--Net Pure Loss Ratios FromUnderwriting and Investment Exhibit

Caption:

The pure loss ratio portion of insurer combined ratio--rangingfrom 69 to 290--paints a dismal picture for products liability.Loss adjustment and underwriting expenses added anywhere from70-to-100 more points in the last six years.

Flag: Chart 2:

Head: The Same Line?

Products Liability Claims Made--Net Pure Loss Ratios FromUnderwriting and Investment Exhibit

Caption:

Products liability loss ratios for policies written on aclaims-made basis, which limit the impact of losses from prioracts, are clearly better than ratios for occurrence-basedpolicies.

Flag: Chart 3:

Head: Improvements Revealed

Products Liability Occurrence--Net Loss & LAE Ratios ByAccident Year From Schedule P

Caption:

On an accident-basis, products liability loss and LAE ratiosdropped from a high of 133 in accident-year 1999 to 66 in 2004 for10 insurers representing two-thirds of the market.