Insurance Industry News

As the data has begun to come in on 2006 reinsurance and insurance industry results – and as the numbers are not only favorable, but support why, in many lines of coverage, the property and casualty market continues to be “soft” – here's a briefing on this important matter.

This report summarizes 2006, year-end results for major reinsurance companies, as well as insurance companies. The companies shown (both reinsurers and insurers) all underwrite some form of professional liability insurance coverage as either direct insurance, or as reinsurance of commercial carriers and captives.

Because changes in the results of reinsurers largely dictate and precede favorable or unfavorable changes in the insurance industry, I have selected a handful of P&C reinsurance market leaders and shown their 2006 and 2005 combined ratios. (All these companies underwrite U.S. professional liability reinsurance risks.)

Company	Net 2006 Premium	Combined Ratio 2005	Combined Ratio 2006
Munich Re	$2.5 billion	214.7%	94.6%
Berkley Re	$1.8 billion	97.5%	93.4%
Transatlantic Re	$3.0 billion	112.9%	95.7%
General Re	$2.0 billion	117.6%	94.9%
Endurance Re	$271 million	96.4%	93.5%

* Source: AM Best

It is a truth that when reinsurers sneeze, insurance companies catch cold. The property and casualty insurance market reacts (usually within six to nine months) strongly in its results to any improvements or deteriorations in the reinsurance market. What follows is a handful of P&C insurance market leaders, and their 2006 and 2005 combined ratios. (Again, all these companies underwrite U.S. professional liability insurance risks, in addition to their general underwritings.)

Company	Net 2006 Premium	Combined Ratio 2005	Combined Ratio 2006
ACE	$12.0 billion	99.5%	88.1%
AIG	$44.8 billion	104.7%	89.1%
Chubb Corp.	$11.9 billion	92.3%	84.2%
Hartford Group	$10.7 billion	93.2%	89.3%
Liberty Mutual	$15.3 billion	105.4%	101.8%

* Source: AM Best

Generally speaking, reinsurers as well as insurers can underwrite profitably until they hit a combined ratio of 102.5% given current net investment returns in the industry and the asset allocations of most insurer portfolios (still largely weighted heavily to fixed investments).

The average ratios throughout the industry improved dramatically in 2006 almost across the board. Two foreign reinsurers, Swiss Re and Scor Re, both had combined ratios of more than 130% at the end of 2006, but they are the exceptions to an almost entirely profitable reinsurance and insurance marketplace. This news bodes well for July 1, 2007 professional liability renewals (50% of the U.S. property and casualty market renews on this date) and for the October 1, 2007 renewals.

The only thing that could conceivably stop this soft market progress in its tracks would be a late summer/early fall hurricane season of significant proportions. Early signs, from those who predict weather trends, indicate a worse than average season in 2007. Obviously, another unexpected and significant terrorist attack on a major target would have a devastating effect on the marketplace.

With respect to professional liability insurance coverage, and that marketplace, there are consistent warning signs on the horizon of a continued upward movement in individual claim severity, with regard to individual case and claim reserves. Loss frequency is declining dramatically in the physician and hospital professional liability marketplace, for example, in a number of key states, including Connecticut. However, individual claim severity is higher than it has ever been. Simply put, the frequency of claims has decreased; but the severity of the average paid loss has increased. This is due to many factors. One key factor that we are watching closely is the effect that the public’s immediate access to quality reports and other pre-screening devices on the Internet will have on the assertion of claims and their development. It is no secret that, very shortly, the public will have access to, almost universally, quality and outcomes information (largely through state licensing agencies) that will not only determine who the public chooses for its health care services, but will serve to set the stage for potential increases in claim activity related to facilities as well as practitioners who are seen as repeat offenders.

We are also watching closely the various “I’m Sorry” legislative initiatives that have taken hold in many states – most recently in Virginia and Connecticut. While it is too early to tell what effects these legislative efforts on disclosure will have on practitioner professional liability claims, the “I’m Sorry” strategy has been utilized very effectively by hospitals, nursing homes, and other corporate health care providers as a claim reduction strategy.