Comml Insur Reserves May Be Short $13B To $20B - Report

   Of DOW JONES NEWSWIRES

NEW YORK -- Commercial insurers reserves for potential losses from 1997 to 2001 could be short by as much as $20 billion.

In a research report Tuesday, Cochran Caronia Securities analyst Adam Klauber said industry reserves for commercial lines could be deficient by $13 billion to $20 billion, representing 10% to 15% of the estimated commercial lines surplus and virtually all of the commercial sector's 2002 earnings.

"The necessity to increase reserves for prior-year claims will likely drive weaker companies to soften the competitive landscape as they attempt to grab market share," Klauber said. "Insurers are under pressure from rating agencies and the equity market to show earnings and increase capital. By expanding premiums in the 2003 and 2004 underwriting years, which are expected to be highly profitable, lower-tier competitors have the potential to underwrite themselves out of their reserving hole."

However, the depth of the 1997-to-2001 reserve hole could extend the hard market - a period of higher rates and tighter underwriting, Klauber said.

The industry's margin for error appears relatively narrow, Klauber said. One or two large "shock" losses could cause several weaker companies to retrench or withdraw from the market. Under this scenario, commercial line pricing would likely continue to rise through 2005.

Klauber's estimate excludes asbestos and environmental losses, other pre-1997 claims and a large portion of directors and officers insurance losses.

A conservative estimate of those unrecognized losses could add an additional $35 billion to his view, Klauber said.

Klauber said the reserve shortfall for accident years 1997 to 2001 was driven by a variety of factors, including lower rates due to market-share-driven competition and excess capacity in the industry, reserve practices that were slow to recognize loss-cost increases and an increase in class-action lawsuits. The availability of inexpensive reinsurance also promoted market-share expansion, he said.

-Chad Bray; Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated June 10, 2003 9:52 a.m.