Can Long Tailed Lines of Business Really Afford Higher Loss Ratios?

Perhaps the most commonly accepted principle of modem property and liability insurance is that longer tailed lines of business are able to operate profitably at higher loss ratios, or almost equivalently higher combined ratios, than short tailed lines. A combined ratio of 120% might be devastating to an auto physical damage line of business but quite healthy for per occurrence excess liability reinsurance. However, this maxim may be eroding due to three real world forces: 1. The requirement that property and casualty insurers generally hold loss reserve liabilities at full undiscounted values. 2. The requirement that additional surplus capital be held to support risk in loss reserves on top of surplus held to support current writings. 3. The demands of investors, insurance executives, and modem capital markets that profits be high enough to support all invested capital at a cost per unit of capital judged to be commensurate with the perceived exposure to risk.