Insurance: So Many Disaster Areas

-- Industry reserves haven't recovered from 9/11 payouts, market losses, or corporate defaults

-- Corporate scandals will result in more costly commercial coverage this year

Insurers haven't had it this bad in years. In 2002 alone, payouts for damage caused by the September 11 attacks totaled $40 billion. Lawsuits related to asbestos and hazardous-waste sites have been rising, bumping up claims costs. And with financial markets weak, insurers that expected big returns from their huge portfolios have been disappointed.

"I've never seen anything close to the disarray among insurance carriers today," says Michael D. O'Halleran, chief operating officer of Aon Corp. (AOC ), the world's second-largest insurance broker.

The industry won't suffer quite so much going forward--earnings may even revive this year. The one certainty is that insurers will roll out another round of double-digit premium increases across the board.

Commercial property-and-casualty insurers are likely to roll out the biggest rate hikes. Any business facing large liability risks--from the contamination-prone meatpacking industry to large Wall Street firms open to shareholder lawsuits--will see a repeat of last year's 20%-to-50% premium increases. Then there are the casualty insurers that offer coverage for directors and officers (D&O), protecting the personal assets of executives in securities litigation. This group could boost premiums by up to 500%. Chubb Corp. (CB ), for example, is raising its rates sharply after losing $1.16 on every $1 of D&O premiums it collected in the first nine months of 2002.

The rate hikes will help insurers cover the settlement costs from corporate fraud cases involving the likes of Enron Corp. and WorldCom Inc. And as stricter corporate governance measures take effect, shareholder class actions will proliferate. CEOs, for example, are now required by law to attest to the validity of their companies' financial statements. "There's so much anxiety over lack of D&O coverage that prices are bound to increase," says Christopher McShea, Ernst & Young's national director in property-and-casualty actuarial services.

The pricing pressure is starting at the top. Reinsurers, the large entities such as Swiss Re (SWCEY ) and Munich Re that primary insurance carriers buy coverage from to reduce risk, have upped their rates to recover capital reserves depleted by large September 11 claims and stock market losses. Munich Re had to infuse $2 billion into its American Re unit. General Electric Co.'s Employers Re expects a 2002 loss of up to $450 million and is not optimistic about 2003. In this environment, analysts anticipate a flight to quality. That could bring a lift to Warren E. Buffett's well-capitalized General Reinsurance Corp., among others.

Health insurance is expected to creep up an additional 15% next year as medical costs continue to rise, along with malpractice claims. And life insurers have their own problems. In September, Fitch Ratings downgraded 35 life insurance companies because poor financial returns had reduced their net income and taken a heavy toll on their capital bases. These companies are expected to see lower incomes that could translate to higher life insurance premiums in 2003.

In the personal lines, high premiums will hit consumers again this year, though the increases won't be as drastic as in the commercial arena. Drivers can expect relatively modest premium increases, on the order of 6% to 12%, for car coverage. Homeowners, however, might see hikes of up to 15%. The reason? Unexpectedly high disaster-recovery costs from October's Hurricane Lili and tornadoes that swept across the nation in November. Homeowners and insurers alike are hoping the string of such costly catastrophes won't be repeated in 2003.

By Pallavi Gogoi in Chicago

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