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By Robert P. Hartwig, Ph.D.
Vice President & Chief Economist
Insurance Information Institute
bobh@iii.org

September 18, 2001

The property/casualty insurance industry reported a statutory rate of return of 1.7 percent (on an annualized basis) for the first half of 2001, down from 5.6 percent for the first half of last year and substantially below the 6.3 percent return for the year 2000.�� The results were released by the Insurance Services Office, Inc. (ISO) and the National Association of Independent Insurers (NAII).

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Back to Square One?

Financial results for the first half of 2001 indicate that the financial performance of the property/casualty insurance industry—despite a significant hardening across all major commercial lines of insurance over the past 18 months—remains extremely vulnerable to the impacts of catastrophe losses and the weak investment climate.�� Strong growth in net written premiums—up 10.0 percent—was the only bright spot in an otherwise dismal six-month period.�� The increase was the best since the first half of 1987.

Aggressive rate cutting by the Federal continued to drive interest rates lower during the first half of 2001, a major contributing factor in the 5.2 percent decline in investment income.�� The continued swoon in stock prices contributed to the industry’s 21 percent decrease in realized capital gains.

The $19.1 billion decrease in surplus during the first half to $298.2 billion and $41.1 billion decrease since peaking at $339.3 billion in June 1999 means that the industry has eliminated a significant amount of capacity over the past 24 months.�� It is important to recognize that the decline is not indicative of solvency problems for the industry as a whole or the vast majority of insurance companies, nor does the decline present any difficulties for insurers who will be paying.�� Many analysts had previously estimated that the industry held $100 billion to $125 billion in “excess” capital.

Net underwriting losses soared 39.2 percent during the first half of 2001 as years worth of chronically underpriced business continued to assault the industry’s balance sheet.�� Sharply higher catastrophe losses ($6.6 billion during the first half), higher medical claims costs, the increased prevalence of mold claims (especially in Texas) and auto fraud (such as rampant no-fault fraud in New York state) also drove costs up during the first half of 2001.

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Terrorist Attacks of September 11, 2001

The terrorist attacks that destroyed the World Trade Center complex, four aircraft and seriously damaged the Pentagon will probably be the largest insured loss in the history of property/casualty insurance.�� The losses from the attacks are not recorded in the financial statistics reported here but will be reflected in the third quarter financial figures which will be released in December.
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Insured property/casualty losses from this week’s attacks will be significant in a number of lines of insurance, including commercial property, liability, workers compensation, aviation, and auto.�� Property/casualty insurance losses do not include claims paid under life or health insurance policies, though losses in those segments are expected to be significant as well.

Fortunately, the global property/casualty insurance, life insurance and reinsurance industry today has the financial strength to handle the losses from the damage to property and life caused by the terrorist attacks.�� Insurance coverage on large risks such as the World Trade Center and airlines traditionally are insured by a large number of insurance and reinsurance companies around the world. The major companies involved have great financial strength and integrity.�� The solvency of the property/casualty insurance industry is not in question.

Any determination of insured property/casualty losses will take into account the property damage to the World Trade Center complex and adjacent buildings; business and personal property of tenants and their employees; workers compensation benefits for dead or injured workers; claims for lost business income; the cost of establishing alternative, temporary operations at off-site locations and damage to vehicles.�� Aviation policies and other liability coverages also will be impacted.

The U.S. government is self-insured, so physical loss to government buildings is not a commercial insurance issue.�� Insured commercial businesses within the Pentagon, for example, could incur insured losses.

Official loss estimates will be released in the weeks ahead.

A detailed industry income statement for the full-year 2000 follows:

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