Industry Showing Improvements Raters Say

In its report, Fitch reviewed p-c insurance reserves for 2003, and noted that while deficiencies remain, they are receding.

Fitch said it estimates that industry reserve deficiency stood at between $43.5 billion and $61.5 billion at year-end 2003. This is an improvement from its 2002 estimate where Fitch said industry deficiency stood at between $46 billion to $77 billion.

Non-asbestos deficiency at year-end 2003 stands at between $23 billion and $26 billion, down significantly compared to between $32 billion and $38 billion for reserves held at year-end 2002.

Asbestos reserve deficiencies are estimated to fall between $15.5 billion and $25.5 billion for reserves held as of year-end 2003. Reserve deficiencies for other exposures with long-tail implications, such as environmental, silica, and tobacco, for 2003 are estimated to be between $5 billion and $10 billion.

Looking at 2004, Best examined operating results for the nine-months 2004, noting that despite the onslaught of four hurricanes hitting Florida this year, the industry reported very strong operating results.

The p-c insurance industry recorded an estimated $3.4 billion, Best said, highlighting "the strong underwriting fundamentals present since 2001." The combination of strong underwriting standards and compound annual rate increases resulting in an influx of earned premiums from prior policy periods has slowed the pace of growing loss costs, Best said.

Despite losses from the Florida hurricanes, which amounted to more than $20 billion, the nine-month combined ratio improved to 97.8 compared to 100 in 2003. However, the third quarter alone witnessed a combined ratio of 104.2, which compares to a 93.3 combined ratio in the first quarter, and 95.7 in the second quarter of 2004.

The industry's solid underwriting results and improved investment income helped lead the industry to pre-tax operating income of nearly $32.4 billion in the nine months of 2004.

However, Best warned that the industry can not continue its current combined ratio performance because of the noticeable gap between the percentage increases in net written premiums vs. net premiums earned as reduced premium writings affect earned premium results in 2006.