LOWER RATES MAY SIGNAL RISKY COMPETITION: ILU

LONDON-The continuing downward pressure on rates may be good news for buyers but could mean bleak prospects for London insurers, warns the Institute of London Underwriters.

Last year was the seventh year in a row that claims paid by ILU member companies exceeded premiums, with premium volume totaling (British pounds)

1.57 billion ($2.55 billion) compared with (British pounds) 2.09 billion ($3.39 billion) in claims, the ILU reports.

The year was characterized by "pressure on rates, an increase in the number of vessels lost and airline accidents up, with a consequent increase in passenger fatalities," said ILU Chairman Nigel Jenkins at the institute's annual meeting last month.

Those factors alone may not be a problem if they are handled by strong management, he said. But Mr. Jenkins said he was concerned that underwriters have instead yielded "to foolish competition."

"With the losses of recent years still fresh in our minds, it is hard to understand how we can be confronted with the scale of rate reductions we have seen in the hull and energy markets," he said.

In its annual report, the ILU warns that additional rate reductions in marine hull coverage will result in a return to unprofitability for underwriters.

"It is difficult to be optimistic about the immediate future," said the ILU report, though it noted that deductibles on marine hull business are holding up.

The energy insurance sector has felt "vicious downward pressure on rates," possibly more than any other class of insurance, because of intense competition in both London and international insurance markets, according to the ILU. Massive overcapacity, coupled with extremely low levels of claims, has translated into broad rate reductions for energy policyholders.

Despite seeing an influx of new capacity, marine cargo business produced a "reasonable result" for insurers last year, though the ILU expects it, too, will be under pressure to cut rates.

Aviation insurers were not exempt from the downward trend in rates. 1996 was an adverse year for aviation underwriters, said the ILU report, and rate declines accelerated in late 1996.

"It was obvious that insufficient notice had been taken of the warning given (by the ILU in 1995) that determined action must be taken in 1996-otherwise rating levels could be undermined by such over-optimism," the ILU report said.

The ILU cited several categories of losses affecting the institute's underwriters in 1996:

The number of fatalities from airline accidents worldwide last year was 1,437, up 375% compared with the 383 in the previous year, making it the second-worst year on record, according to the ILU.

Lives lost at sea nearly tripled to 1,190 worldwide last year from 316 in 1995, though this figure was skewed by the Bukoba ferry disaster, in which a passenger ferry capsized on Lake Victoria in Tanzania and about 700 people drowned.

Merchant ship losses reached 105, more than 20% higher than the 1995 total of 95.

Merchant ship tonnage lost was down 5.7% to 653,775 gross tons in 1996, compared with 693,433 gross tons the previous year.

The number of aviation hull total losses were up 25% to 25 in 1996, from 20 in 1995. The estimated overall cost of hull losses for Western-built jets climbed 14% to $477 million from $418 million in 1995.