U.S. not out of woods

While rates are on the rise, the price correction may not be enough to counter the U.S. industry’s expense problems, says a new report by A.M. Best. Figures from the last quarter of 2000, as well as yearend results, show that net premiums rose a “moderate” 4.9%, and that rate hardening in both commercial and personal auto lines has fallen short of the mark in dealing with expense ratios. Further more, the study notes, “the same conditions that led the industry into the prolonged soft market – market fragmentation, increased transparency, excess capital and too many players – persist in today’s environment, ensuring that the industry’s recovery will be moderate”.

The industry’s combined ratio shot up to 115% in the last quarter of 2000, up from 112.1% for the same quarter of 1999. For the year, the combined ratio sits at 110.4%, up from 107.8% in 1999. The report predicts that poor underwriting results will continue to hamper the industry through the coming year, but will improve “mildly” in 2002.

Net income was down for the year, at 20.6 billion, a 6% drop from 1999. This was largely due to an almost 40% increase in underwriting losses, and was only marginally offset by a 5.5% increase in investment income.

While results were poor for all three segments of the industry, they were most pronounced for the reinsurance sector. (See chart 2) Additional retrocession costs resulting from global cat losses, adverse loss-reserve development and the continued soft market are to blame, the report suggests. Combined ratio for the reinsurance segment was a whopping 122.8% for the fourth quarter of 2000, and 116.4% for the year. “This deterioration suggests continued insufficient pricing…and significant actions taken by ceding companies to strengthen prior accident-year loss reserves.”

In commercial lines the results were less desperate, with the combined ratio for 2000 at 109.4%, a result consistent with 1999’s 109.8%. Despite rate increases, loss ratios have not been seen because of rising loss costs and “broad coverage interpretations” causing unforeseen losses. Rising medical costs will continue to hamper margins in the future, the report predicts, and consolidation should grow in the sector as companies seek financial strength.

Medical cost inflation, as well as rising auto repair costs, also took a toll in personal lines last year, resulting in a yearend combined ratio of 110.3%. This ratio could rise to 110.7% by the end of this year, but may improve slightly in 2002, A.M. Best suggests.

On a bright note, total cat losses were down to $4.3 billion last year, compared with $8.2 billion the year prior. But the report also suggests that further asbestosis exposures loom on the horizon.

P&C Financial Indicators

For 12 months ending Dec. 31

($ billions)

P&C Segment Trends

2000 Yearend Comparisons