Stamford, Conn. — Buffeted by ill-winds on all sides, the reported statutory surplus for the for U.S. property/casualty insurers at the end of the third quarter is projected to decline according to estimates from Stamford, Conn.-based global professional services firm Towers Perrin.

The decline is expected to be as much as $42 billion, or 8%, from the beginning of the year, and the projected industry combined ratio for the third quarter is 116.6%, with an underwriting loss of $18.5 billion.

The primary culprits are a softening of commercial insurance prices coupled with the claim experiences of the private mortgage and financial guarantee insurers, which are included in the composite.

“The industry’s results have generally been deteriorating,” Stephen Lowe, managing director of Towers Perrin’s global property/casualty insurance practice, told Insurance Networking News, adding that the claims losses incurred by mortgage and guarantee insurers were enough to skew the results for the rest of the industry. “Their experience in the first half was truly unrewarding—they had a 242% combined ratio.”

Yet losses related to mortgage defaults don’t tell the whole story. After some years with light catastrophe losses, insurers were hit hard by hurricanes Dolly, Ike and Gustav. For example, St. Paul, Minn.-based The Travelers Cos. Inc. reported a 82% decline in third-quarter revenues compared to the previous year, blaming claims paid out as result of the storms for the loss. 

Claims for the industry as whole tallied about $20 billion, Lowe notes. “That’s substantially worse than the third quarter of 2007,” he says, noting that the third quarter is historically the worst for the industry, and not just because of hurricanes. “Auto insurance claims peak in third quarter. There’s no easy explanation for it, it’s just a long-term, seasonal effect.”

Lowe says the quarter only reinforces the need for the industry to take measure of its risk culture. Indeed, as the turmoil in the financial market played out and insurance giant AIG was humbled by an inability to assay the risks it faced, many outside the industry began to wonder aloud about the efficacy of risk management both within the industry and in general.

He also says these questions about the viability of risk management regimes are something of knee-jerk reaction.

“These are some who say ‘risk management doesn’t work,’” he explains. “Our view is that if you look deeply at what transpired with banks and insurers, you can point to very specific shortcomings of the processes as they were implemented.”

The problems stem from over reliance on tools at the expense of a holistic approach to risk management, Lowe says. 

“There was too much number crunching and a failure to step back and look at overall strategic trends,” he says. “Sometimes companies get mired in the details and think the system is the solution. The system is just a series of measurement tools that someone should be using to make a broader assessment of what’s actually transpiring.”        

Sources: Towers Perrin, Travelers

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