Commercial P-C Reserve $20 Billion Deficient

"We were surprised at the rate of deterioration," noted Cochran managing director Adam Klauber in an interview with National Underwriter. "There is a substantial amount of unrecognized loss development that will have to be recognized in the coming years," he added.

The deficiency equates to 10 to 15 percent of commercial lines surplus and represents virtually all of the commercial insurance earnings for 2002, the study noted. In addition, the reserve shortfall may force carriers to fund claim payments with future earnings.

The survey estimate excludes asbestos and environmental claims, pre-1997 losses, and a large portion of directors and officers claims. Unrecognized losses in these lines would increase the deficiency by an additional $35 billion, the survey noted.

According to Mr. Klauber, the major reasons for the deficiency are "the low premiums charged during 1997 to 2001, claim inflation during the past two years, rising medical costs and the class action boom."

Other conclusions of the study:

Reserve deficiencies for 1997 to 2001 will most likely reduce commercial lines profitability by 5 to 10 percent annually for the next 5 to 10 years.

Intense pressure for higher reserves will force weaker commercial insurers to become more aggressive in obtaining a larger part of market share and may soften the competitive environment.

Paid-to-incurred ratios for 1998-2000 accident years are materially higher than historic averages by 3 to 8 percent. This signals that greater than expected claim activity from prior years is causing claim payments to outpace reserves.

"The current hard market will help underwriting profitability and should give insurers more flexibility and cushion the blow in dealing with these past reserve problems," Mr. Klauber said.