Why is this Full Outer Join not working?
You should do an isnull on both policynumbers so that you can group properly.

Since it's an outer-join, there's the possibility of one side of the join being NULL while still having data.

select sum(premium) Prem_Sum, sum(Loss) Loss_Sum, isnull(t1.policynumber, t2.policynumber)
from t1 full outer join t2 on t1.policynumber = t2.policynumber
group by isnull(t1.policynumber, t2.policynumber)