Old Problems Still Haunt P-C Industry

Karen Horvath, vice president-commercial lines, explained that individual states define who gets an assessment differently. One may assess commercial insurers only, others will tap any insurer writing business in the state, and still others will hit all except those writing a particular line.

Another old problem–mold–had analysts at three rating firms reaching slightly different conclusions about the ratings outlook for personal lines.

Mold has "been around since the dinosaurs," said Charles Titterton, an analyst with Standard & Poors in New York during a mid-December conference call. Since mold claims began to "rear their ugly heads" in 2001 after a $32 million settlement, one Texas company–State Farm Lloyds–ended the year having lost all of its $700 million in capital (before replenishment by State Farm), he said. He added that only 2 percent of all Texas homeowners had filed mold claims.

Speculating that mold could add three points to the national homeowners combined ratio in 2001 (of roughly 125) "and perhaps, at least that much, in 2002," he stressed that the industry is fighting back. Initiatives include trying to cap amounts payable, offering coverage as an endorsement and subjecting mold to a new standard that would have policies respond to sudden and accidental damage, but not chronic problems.

While S&P maintains a "negative outlook" for the personal lines sector for 2002, Mr. Titterton said he thought the sectors results, buoyed by improved auto pricing, could turn around in 2002.

With less capital, "some players, like Nationwide, Farmers, and to a lesser extent Allstate and The Hartford, can no longer compete on price [and] theyll be forced to forego poorly-priced business to a greater extent than previously," he said, noting that those companies represent over 20 percent of the market.

At Fitch in Chicago, an improving auto line prompted the rating agency to change its personal lines outlook to "stable" from "negative," but homeowners is still a "pretty lousy line from a profitability perspective," said managing director, Keith Buckley. "In many ways, it always has been," he said, adding that while "mold is a wild card" for the line, it wasnt enough of an issue to warrant a negative outlook for personal lines.

"Were not sure [homeowners] is any worse at this point than it has been, but its something were taking a look at," he added, noting that the question of whether homeowners has become chronically worse is one that has sparked some internal debate at Fitch.

A.M. Best highlighted Midwest weather losses as a chronic problem for homeowners insurers, devoting a page of the firms recently-released 20-page "Review/Preview" report to the topic. "The change in weather pattern in the Midwest," Mr. Andre said, "really isnt a change anymore. Its a cost of business going forward."

The Best report includes product line combined ratio estimates for 2001 and 2002, which show the homeowners ratio improving to 117.5 in 2002, but staying nearly 15 points above a breakeven level of 103. (Best defines a breakeven ratio as one that would produce no profit or loss with underwriting and investment income results added together.)

While Mr. Andre wouldnt be coaxed into saying that homeowners insurers are fighting a losing battle, he noted that the uphill struggle is much slower than in other lines. "If you get a 4-to-5 percent increase in rate, thats on an average premium of [about] $500. Thats not a whole heck of a lot more premium," he said.

In contrast to homeowners, Best projects that workers compensation will be the only major line that will be better than breakeven in 2002–roughly four points better at 107.8 But ratings for workers comp insurers remain under pressure, Ms. Horvath said.

"Essentially, what youre seeing is a time issue," she said to explain the difference between the underwriting projection and the ratings outlook. "While were expecting better results for 2002 in workers comp [and] most other commercial lines," ratings pressure stems from the fact that insurers will report poor 2001 results over the next month, she said. "There is a lot of reserve inadequacy on the balance sheets," she added.

Best estimates $9.5 billion of adverse loss development for all lines in 2001 and $7.5 billion in 2002, bringing the firms estimated core (non-asbestos and environmental) reserve deficiency down from $40 billion to $23 billion for the industry.

Different answers to questions of how much p-c insurers will pump into reserves–and when–accounted for some of the difference between projected underwriting results the three rating agencies came up with for 2001 and 2002.

Fitchs analysis, which assumes $7.5 billion of reserve strengthening and $16 billion of 9/11 U.S. losses recorded in 2001, forecasts a 115.6 combined ratio for 2001 and 107.8 for 2002. The 2002 estimate includes $10 billion of "spillover" charges, Mr. Buckley said.

While Bests overall combined ratio estimates were similar at 117.0 and 107.5 for the two years, the reinsurance segment showed the most variation between firms. For reinsurance, Best and S&P predict 2002 combined ratios of 105.5 and 103, respectively, while Fitch forecasts 113.5. (S&P's estimate is for global reinsurance.)

The firms all have negative ratings outlooks on the commercial and reinsurance sectors, but analysts predict the outlooks will stabilize late in 2002.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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