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Letter to the Editor

A.M. Best Releases Preliminary 2001 P/C Financial Results

In a recent statistical study, A.M. Best Co. released its preliminary 2001 financial results on the property/casualty industry, which reveal that property and liability lines had significant new risk exposure in 2001.

The result has been an acceleration of market hardening at a time when most insurers and reinsurers are unwilling to cover terrorism risk.

The negative impact on the profitability of the property/casualty industry in 2001 was caused by Sept. 11, the Enron scandal and growing mold problems in Texas. Sept. 11 alone caused every line of significantly exposed business to record its greatest loss ever. In an effort to counteract the effects of these and other catastrophic events, insurers will have to more strictly monitor their spread of risk on a geographical and business-class basis, exclude or fully price most uncertain risks and optimize their reinsurance programs. Likewise, insurers are paying much more attention to their bottom lines than to top-line growth, and markets with restricted pricing or limited profit potential are experiencing tighter capacity.

The following are the trends in the commercial lines:

• Price firming was apparent well before Sept. 11, as years of price wars exhausted reserve redundancies and some competitors exited certain markets or tightened underwriting.
• Upward climbing combined ratios prompted a return to operating fundamentals.
• With price firming more aggressive, the middle market is now more attractive to commercial insurers.
• The commercial automobile market was so underpriced before the current turnaround that several years of substantial rate increases are needed before reasonable profitability is achieved.
• Higher loss-cost trends in workers' compensation put a drag on profitability and caught many startup companies by surprise, resulting in major reserve charges and subsequent market dislocation.

The following are the trends in the personal lines:

• The consumer-driven personal lines market has been slower to turn around.
• The number of large named catastrophes decreased in 2001, while the frequency of small events skyrocketed.
• Tropical storms have proven highly destructive.

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