Prior accident year losses continue to hamper U.S. reinsurers: A.M. Best

Despite strong sector results in 2003, 2004 is showing the lingering pain of adverse development on prior year claims for U.S. reinsurers, according to a new statistical study by A.M. Best.
2002 was a record year for reserve charges amongst U.S. reinsurers a total of US$7.9 billion in adverse reserve development was recorded, adding 31 points to the sector’s combined ratio, which hit 122.8%.
In 2003, reserve development dropped to US$3.4 billion, adding 11.7 points to the combined ratio, which hit 100.6%. But, A.M. Best notes, in the first half of 2004, adverse development has already added 9.5% to the industry’s combined ratio.
“Although the extent of further adverse reserve development is not expected to be as severe as reported in 2002 or 2003, further emergence of reserves is expected to occur from those casualty classes that were under-priced significantly during the soft market,” the statistical study notes.
At the same time, 2004’s combined ratio will likely be hit to the tune of 10 points as a result of the record hurricane activity this fall, the rater speculates.
And all of this is happening in an environment of stagnant pricing the 21.3% net written premium growth seen in 2002 dropped to 6.2% in 2003, and promises to decline further for 2004. A.M. Best says gross written premiums contracted by 9% in the first half of 2004.
Another key factor driving the U.S. industry and intensifying the impact of adverse development is its concentration the top ten writers account for 90% of surplus and about 80% of gross written premiums. The top direct writers – Swiss Re, GenRe, Employers Re (now GE Insurance) and American Re (part of Munich Re) account for just under 50% of industry surplus, but none has reported an underwriting profit in the past five calendar years. Thus all are reliant on parent support.
The result is that the emphasis on technical pricing should not disappear anytime soon, says the rater. “The more astute [reinsurers] will take a long-term approach to maintain strong financial strength and stem the potential for future reserve strengthening as the cycle softens. On the other hand, others will adopt a more short-sighted approach by writing irrationally to satisfy shareholders’ demand for adequate return on capital.”