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Microsoft Word - 1112zd Insurance Times
: Analysts say continued rate hikes necessary for recovery
November 12, 2002, Vol. XXI No. 23

WHITE SULPHUR SPRINGS, WVA - Expert insurance analysts believe that the industry will remain in a
hard market through 2003, but they questioned whether carriers have the discipline to maintain across-the-
board 15-20 percent rate increases in 2004 even though they are needed to help recover from past under-
pricing.
At the 89th annual Insurance Leadership Forum at The Greenbrier, a panel consisting of V.J. Dowling, an
industry stock analyst from Dowling & Partners; Muck Puccia, managing director of Standard & Poor; and
Jody Jonsson, a financial analyst with Capital Group, discussed the state of the insurance industry's
finances.
The Greenbrier meeting, sponsored by The Council of Insurance Agents and Brokers and The Council of
Insurance Company Executives, brings together agents and brokers who write 80 percent of commercial
property/casualty insurance annually and the biggest names in the carrier business.
One of the most significant issues facing the industry, the experts agreed, is lack of reserves to cover the
cost of liabilities from coverage written at inadequate prices. Although the market had begun to harden last
year and accelerated that trend after the Sept. 11, 2001, terrorist attacks, in general the experts agreed the
industry remains seriously under-reserved.
Dowling described the industry's financial state as "very much of a mixed situation" and said it is "going to
be a long time" before the industry is able to generate an acceptable return on equity despite rate hikes for
the past year across all lines of commercial business.
"Nobody's getting rich these days," Dowling said.
Puccia, who is in charge of rating insurance companies related to their financial stability and other factors
affecting their ability to do business, described the balance sheet issues brought on by reserve deficits as
"absolutely overwhelming." He said the industry needs another year or two of 15-20 percent price increases
at a minimum to generate enough capital to "plug the reserve hole."
He said 2003 will remain a hard market, "but the problem is: will 2004 be a hard market?"
Puccia said that some "reserve holes" are the result of losses from unforeseen events such as asbestos
liability, but a "healthy chunk" is due to past years' "bread and butter business being under-priced."
The size of reserve shortages is open for debate, the experts agreed. Alice Schroeder, a prominent industry
analyst for Morgan Stanley, recently speculated that the figure was $120 billion. Dowling and Puccia said
they thought Schroeder's estimate was too high and that it was closer to $80 billion.
Regardless, they said, the figure is big enough to impact the financial stability of a number of carriers if the
market fails to hold on to its current discipline and ends this hard cycle before reserves are adequately
rebuilt.
Dowling said he thinks the rating agencies, with their existing rating system, are not doing an adequate job
of calling attention to insurance carriers in financial difficulty.
"How much responsibility do you and your peers at the rating agencies have?" Dowling asked Puccia.
"You're afraid to knock them down (from an A minus rating to a B) because when you do, you kill them.
You put them into a death spiral."
But Puccia disagreed, saying the rating agencies are doing the best they can to watch for trouble signs and
call attention to potential problems as soon as they can.
"If we do anything other than getting the ratings right as soon as we can, we're going to pay for it," he said. Puccia and Dowling said perhaps it is time for insurance carriers with better ratings, such as AAA, to start
charging higher premiums than their competitors with A or A minus ratings because they offer more
security against insolvency.
"What other business do you know where you don't get a better price for better security?" Dowling asked.