Risk Management

Insurers to Blame for Insurance Hikes, Survey Suggests

Lack of risk management by risk management experts has led to huge jumps in P/C premiums, study says -- under-reserving the culprit.
David KatzJuly 3, 2003

Memo to CFOs on Independence Day: Think about self-insuring more risk—and giving your insurers the boot.

Property-casualty insurers haven’t shown a whole lot of client-centeredness in recent years, that’s for sure. Take the issue of the premium hikes many corporations have been enduring.

But finance executives and risk managers wondering why their companies have had to shell out such high premiums for property-casualty insurance apparently need look no further than their carriers’ inability—or unwillingness—to gauge their own risks.

That’s one possible interpretation, anyway, of recent analysis of insurer reserving practices conducted by Weiss Ratings. According to the Weiss analysis, insurers realized late in the game that they’d misgauged the amount of money they should have on hand to pay their claims. So, the carriers shoveled huge sums of money into their claims reserves.

Indeed, P/C carriers boosted their reserves for prior-year paid and unpaid claims by $22.1 billion in 2002, on top of an $11.7 billion increase in 2001, according to Weiss, which rates financial services firms on a non-fee basis. In contrast, the companies had to increase reserves by just $100 million in 2000.

Last year’s boost, in fact, represents the biggest reserve adjustment made by P/C insurers in Weiss’s annals. The increase “reflects the companies’ failure to adequately estimate losses,” according to the rating company.

Why did insurers fail to squirrel away enough funds for a rainy day? “Instead of setting aside reserves based on conservative actuarial estimates, insurers in the ’90s were under-reserving in an attempt to boost profits,” said Melissa Gannon, vice president of Weiss Ratings. “Now it’s come back to haunt them, effectively driving up premiums for today’s policyholders.”

Besides the premium hikes, insurers’ dimness about the extent of their future risks has spawned anxieties among corporate buyers about the safety of their insurance policies.

For their part, insurers have been crying all the way to the bank. Even as they were being forced to sock away more in claims reserves, they managed to turn a tidy profit. P/C insurers earned a profit of $13.3 billion in 2002, compared to a $3.4 billion loss in 2001, according to Weiss.

Tight underwriting and tidy investment gains fueled the robust P/C profits, according to Weiss. Insurers cut their underwriting loss from $49.6 billion loss in 2001 to $28.3 billion in 2002. The carriers then made up for that underwriting loss by earning $43.1 billion in investment income, a slight rise from the $40.7 billion they recorded in 2001.

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