P-C Insurers Record First Net Loss Ever

In the joint announcement, the two groups said that the industrys combined ratio hasnt been that high since 1985, when the figure was 116.5. The highest combined ratio came in 1984, at 118.

Although prior ISO financial reports show that the mid-1980s hard market pushed the ratio down 8.4 points in 1986, a similar improvement predicted by many analysts for 2002 now seems questionable. Their forecasts, hovering around 108, were based on assumptions that insurers would release most of their bad news about 9/11 losses and reserve deficiencies in 2001. (See NU, Dec. 24, 2001, page 5.)

While experts believe U.S. insurer net losses from the terrorist attacks will ultimately reach $25 billion, the year-end figures reveal that only about $10 billion of those losses were recorded in U.S. insurer financial results for 2001, according to John Kollar, ISO vice president-consulting and research.

On the reserve front, the ISO/NAII figures reveal a $16.1 billion boost in loss reserves from 2000 to 2001.

Thats about a 4.5 percent increase, said Michael Murray, an ISO assistant vice president, noting that the percentage is "certainly larger than some of the negatives weve been seeing" in recent years, but "not a huge number."

Given that some of those reserves relate to 9/11 losses and to asbestos liabilities, its not clear how much of a dent the boost put into an industry-wide core (non-asbestos and environmental) reserve deficiencyestimated to be in the range of $16 billion to $54 billion as of year-end 2000. (The range is based on previously-published studies by A.M. Best, ISO, and Conning & Co. in Hartford.)

"I dont think anybody would have expected the insurance industry to make up all the deficiencies in reserves in a single year necessarily," Mr. Murray said.

Mr. Murray also pointed out that workers compensation losses are coming in higher than expected, potentially foreshadowing the need for higher reserves in 2002. In addition, he noted that it is yet unknown whether insurers are reserving for "potentially massive losses" from Enron and other bankruptcies, because of disputes over whether fraud was involved and whether coverage applies.

Referring to some analyses ISO has done by line of business, he said even lines that are unaffected by bankruptcy exposures or 9/11 saw big loss ratio increases in 2001. For example, the pure loss ratio for medical malpractice jumped 23 points, he said.

Some other insurers, with "results already looking as bad as they were" as a result of 9/11 and other events, may have tried to get as much "bad news behind them as possible, so that their positions recover powerfully from 2001 going forward," he said.

Based on the ISO/NAII figures, insurers have more than underwriting losses to recover from. In his published comments on the results, Mr. Kollar also highlighted investment losses.

"Though not widely reported, capital losses on investments in 2001 wiped out more surplus than the $10 billion in terrorism losses included in insurers reported results," he said.

Unrealized capital losses of $17.7 billion, together with realized capital gains of only $6.9 billion, amounted to $10.8 billion in overall capital losses on investments last year.

ISO and NAII also published results for the fourth quarter of 2001, revealing that the industry suffered a $4.8 billion net loss in the quarter and posted a fourth-quarter combined ratio of 120.4. Net written premiums rose 6.2 percent over the level recorded in fourth-quarter 2000.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 22, 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.