Liability Insurers Performance Beginning to Deteriorate
After a decade of falling rates and large profit margins, a new report from Conning urges insurers to review strategies in light of a changing market environment.
Insurance Networking News, November 29, 2012
Signs suggest that a quiet period for liability insurers is coming to an end. Current trends in loss frequency, tort filings and reserve releases suggest that an inflection point may have been reached, according to a new study by Conning.
“The U.S. liability insurance front has been relatively quiet in recent years,” said Jerry Theodorou, analyst at Conning. “Decreasing loss frequency and an ample reserve position have supported satisfactory results even in the face of falling premium rates in the past decade’s soft market. If current trends continue, however, the tort environment is expected to worsen for the defense bar, with adverse loss frequency and severity trends likely emerging for insurers.”
The report, “Liability and Tort Trends: Trouble Around the Corner?”, attempts to parse what it calls “arguably the most complex property/casualty line.” It goes on to warn that satisfactory calendar year underwriting and operating results, as well as several years of benign conditions, are masking deteriorating accident-year results.
The general liability market experienced a soft market from 2005 to 2011, during which rates fell by an estimated 41 percent. Only in the past twelve months or so have rates begun to increase again, according to Conning. Such robust performances attracted new entrants to the market, such as Ironshore, Torus and Starr, targeting liability niches with the largest profit margins. These niches included private and not-for-profit D&O, EPLI, miscellaneous E&O and excess/umbrella.
Taken individually, liability insurers with the worst performances between 2000 and 2011 were the most diversified. According to the report, by category, E&S insurers were the best performers during that span with a combined ratio of 89.7 percent. The second-best performers, with an average other liability combined ratio of 94.9 percent, were multiline insurers with a strong E&S focus. Risk retention groups and mutuals had an average combined ratio of 96.7 percent. Large, diversified multiline insurers, for which other liability was less than 35 percent of their overall writings, had an average combined ratio of 113.0 percent.
“We analyzed the results of the largest insurers of other liability over the past decade to look for long term success factors across varied business environments,” said Stephan Christiansen, director of research at Conning. “While there was a wide performance gap, companies with the most favorable results were found to be either specialists in the line or have a strong focus on smaller ‘main street’ business, with an agency distribution strategy. The focus on smaller business removes the insurer from some of the larger exposures that can give rise to multi-million-dollar claims—an important distinction in the face of potentially deteriorating market conditions.”
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