Why the sudden jump? Figuring out the right price for GL business can be tricky. Insurers share a statistical database for GL business, but the rate-making process is not very accurate. Overall, GL rate-making remains more of an art than a science.

The difficulties of rate-making are aggravated by the long-tail nature of GL business.

Many GL losses might not be apparent immediately after the injury occurs. Some losses might not be reported for many months, so it could be a long time before an insurer knows how many losses a business year has generated.

Insurers must estimate provisions, known as reserves, for known and unknown losses. The most serious losses may not be resolved for five years or longer. So in any business year, an insurer's paid losses are only a small fraction of its ultimate loss costs. Like the iceberg that sank the Titanic, the losses are mainly hidden and hard to assess.

To compensate for the long-tail characteristic, insurers make assumptions about the levels of external competition and rates of socio-economic inflation in order to forecast the ultimate loss cost.

Accurate forecasting is especially difficult in periods when competition and socio-economic inflation have been higher than average. That, of course, is just what we've experienced during the last five years — lots of competition and unprecedented changes to the legal environment.

The long-tail characteristic doesn't affect just rate-making. If an insurer doesn't adequately reserve for its hidden liabilities, its very solvency may be at risk.

For most insurers, the aggregate provision for unpaid losses can be very substantial relative to the insurer's capital and surplus, generally around $2 of reserves to every $1 of capital. This kind of ratio makes an insurer vulnerable to adverse reserve changes. Unless reserve increases can be offset by earnings, reserve corrections directly affect the insurer's capital and earnings. A 15-per-cent reserve increase results in a 30-per-cent hit to capital, affecting the insurer's ability to continue to write business. In the worst-case scenario, the insurer may be out of business.

Not convinced? Then just look at Reliance Insurance Group, the Best's A-rated insurer that failed last year. Reliance, which was incorporated in 1817, is now out of business and under the supervision of the Philadelphia Insurance Commissioner. HIH, an Australian insurer, failed this year after reporting a Cdn$2-billion capital shortfall. Independent Insurance Group, a big British insurer, went bust this June. These three companies were huge writers of long-tail general liability business.

Just last year, we lost a company right here in Canada. Gisco, La Compagnie d'Assurances was ordered into liquidation in May 2000, less than two years after it commenced business.

Insurers have recognized that present rate levels don't adequately reflect contemporary exposures, and they are making substantial corrections to their pricing. For clients with a clean loss history, the rate increase may be in the 10- to 20-per-cent range. For clients with a record of claim frequency or severity exposure, rate increases may be 30 per cent or higher.

But contemporary rate increases must be measured against the rate reductions that our clients have enjoyed during the last five years. Even with a 30-per-cent price increase this year, for some of our clients, the cost of risk is probably at the same level as in 1998 or 1999.

Realistically, after five years of fierce competition, some price correction is necessary.

Our forecast for 2002 is for more of the same. Although the U.S. market started correcting a year ago, commentators say that U.S. results have yet to improve. We expect that it will take a year or two of price correction before insurers in Canada and the U.S. show improved results.