Asbestos and Environmental Incurred Losses Drop Again

Insurers' asbestos and environmental net incurred losses have fallen sharply over the past two years, to $5.6 billion in 1996 and $1.9 billion in 1997, according to preliminary data from A.M. Best Co.

Asbestos and environmental (A&E) losses peaked in 1995, at $10.3 billion, the result of extraordinary reserving actions taken by several large insurers, says W. Dolson Smith, a senior financial analyst in A.M. Best's property/casualty division. "This also occurred in 1996, but to a lesser degree," Smith says. "In 1997, only one large insurer took such an action." The losses affected the industry's 1995, 1996 and 1997 combined ratios by 4.1 points, 2.1 points and 0.7 points, respectively.

In A.M. Best's opinion, 1995 and 1996 was a turning point for the industry as insurers significantly increased their reserves in the face of increased scrutiny from regulators, rating agencies and the public. The firm believes the decline in A&E incurred losses over the past two years reflects larger companies reverting to pay-as-you-go funding after growing comfortable with their reserve levels based on improved risk analysis, as well as soft market conditions that have discouraged large reserve additions.

The 1997 data are preliminary estimates for the industry based on aggregated data taken from property/casualty insurers' 1997 financial statements. These insurers represented 98% of total year-end 1996 A&E net reserves.

The data suggest that while many insurers have begun reserving sufficiently to cover their ultimate A&E liabilities, most have simply maintained parity with their peers. Therefore, insurers' A&E liabilities remain a critical rating issue for A.M. Best.

"Companies that have not taken extraordinary reserving actions will be at a competitive disadvantage as A&E claims continue to emerge," Smith says.

A.M. Best's data also reveal that, while the industry's A&E net reserves rose from $26.2 billion at year-end 1995 to $27.7 billion at year-end 1996, they fell to $26.7 billion at year-end 1997, the first such decline in many years.

"The vast majority of the decline in 1997 was attributable to releases of environmental reserves, particularly among the top 20 companies, as ranked by overall A&E reserves," Mr. Smith says. "Asbestos reserves were only slightly lower, and, interestingly, lower-ranking companies ranking collectively increased their A&E net reserves in 1997.

A.M. Best plans to provide a complete analysis, including competitive comparisons between the largest insurance groups and market share information, in a special report to be published in the summer. In addition, a comprehensive database on Note 26 will be available soon on more than 200 groups and 500 companies.