S&P pegs US commercial reserve shortfall at US$60 billion

Notwithstanding asbestos and environmental liabilities, the U.S. commercial insurance market is facing a reserve shortfall of about US$60 billion, says rating agency Standard & Poor’s. This is despite reserve additions of US$22 billion in 2002 towards prior year losses.
“As its pricing prowess ebbs, the U.S. commercial insurance industry is left with a gaping hole in reserves and the prospect of further downgrades,” says S&P.
Although commercial lines writers’ premium growth is finally outpacing combined loss and expense growth, for the first time since 1986, reserve adequacy leaves the industry vulnerable.
“For the past year or so, we’ve been saying the industry outlook is poised to go to stable from negative, but that idea keeps getting shelved by the litany of negative surprises,” says S&P credit analyst John Iten.
Workers compensation and professional liability are among the culprits, along with the albatross of asbestos and environmental claims. And efforts at tort reform have had limited, localized success thus far.
Nonetheless, Iten expects the pace of downgrades to slow moving forward.
In personal lines, S&P maintains its stable outlook on the back of rising homeowners rates, to the tune of 22%, and a 7% average increase in auto insurance rates. “The U.S. personal lines sector has weathered the ravages of water, wind and fire in 2003 and emerged with impressive operating results,” states an S&P report. “Given a normal catastrophe year, ratings will remain stable in 2004.”
Despite industry losses of US$1.2 billion from Hurricane Isabel and US$2.5 billion, along with US$5.5 billion in other storm losses, insurers’ spread of risk geographically and along business lines meant these events did not produce significant strain.