Intense price competition began catching up with the US property/casualty industry in 1999 in the form of more than $500 million in announced reserve actions. A.M. Best believes this is just the beginning, as far more companies are expected to recognize reserve shortfalls through 2000.
The personal lines segment reported disappointing underwriting results in 1999, with an estimated combined ratio of 106.0 - a 1.7 point deterioration from 1998. Personal auto results deteriorated for the second year in a row. The line's combined ratio was 102.8, aided by 3.5 points of prior-year reserve releases. Lower catastrophe losses and moderate price increases enabled the homeowners' line's combined ratio to remain relatively flat, at 109.
Personal auto showed slowing growth in 1999 as prices continued to fall. This line's underwriting profitability fell to its lowest level in eight years. While personal auto remains profitable, 1999 pricing did not keep pace with loss costs, which rose modestly. Claim frequency remained flat during the year. This was due, in part, to safer autos, improved enforcement of speeding laws and fewer drunken drivers. However, claim severity has risen because of higher medical inflation and auto repair costs, as well as more severe accidents involving sports utility vehicles.
Over the past several years, premium growth in commercial lines has been anemic, as loss-cost savings of the early 1990s were outpaced by premium reductions. As these cost savings have been reflected in premium rates, commercial lines have grown minimally and loss reserve adequacy has deteriorated. The segment produced a combined ratio of 109.0 in 1999, a 1.7 point deterioration from the prior year. Catastrophe related losses account for part of the deterioration, but unfavorable loss development is having a bigger impact. Specialty program writers and workers' compensation companies reported major reserve charges during the year. Many of these losses were triggered by lapses in control or underwriting discipline, combined with the availability of low level and stop-loss reinsurance.
A.M. Best expects loss development to continue to deteriorate. The workers' comp, medical malpractice and commercial package lines were the worst performers in this segment as continued pricing pressures led to further underwriting deterioration. We expect additional reserve strengthening to be reported in 2000.
In 1999, premium volume for the US reinsurance market rallied to show-positive growth on the heels of weaker earnings. While premium rates declined through 1998, property losses and inadequately priced liability exposures led to loss reserve inadequacies early in the year.
The segment is expected to report a combined ratio of 111 for 1999, a 5.4 point deterioration from 1998. The deterioration is due in large part to competitive pricing in the segment, which has caused a deterioration in current accident-year loss ratios and an erosion of prior-year loss reserve redundancies. Catastrophes throughout the world - including hailstorms in Australia, windstorms in the United States, earthquakes in Greece, Turkey and Taiwan, and winter storms in northern Europe - contributed to these poor results, accounting for 9.1 points of the combined ratio.
Accident-year underwriting results have been steadily deteriorating for five years. In 1998 and 1999, prior-year redundancies were used to prop up calendar-year reported results. A.M. Best believes accident-year combined ratios will continue to rise as losses develop more fully and the effects of inadequate pricing are realized.
We believe underwriting results for the property/casualty insurance and reinsurance industries will continue to deteriorate through 2000. While commercial prices appeared to be improving during the second half of 1999, the effects of inadequate pricing in recent years are expected to dampen underwriting results in 2000. Prior-year reserve redundancies are drying up and will no longer be available to prop up reported results
In the long run, A.M. Best expects that results will improve modestly once expense savings and productivity gains from technology investments are realized.
Karen Horvath is vice president, property/casualty division, and Matthew Mosher is assistant vice president, property/casualty division, at A.M. Best Co.