According to a Business Wire report, insurers will have to strengthen their loss reserves in order to be able to meet future claims, as stated in a new Conning & Company study.
Though property-casualty rates have been growing in the recent past, reserves are not at the necessary levels to cover the rising costs of claims. According to the study, eight of the nine property casualty lines are severely deficient with a total reserve deficiency of $16 billion – money desperately needed to catch up to claims made between 1998-2000. In addition, the recently acknowledged recession and the events of Sept. 11 will further pressure insurers’ ability to return to profitability. The study claims that individual insurers, however, appear to be slow to take action when having to deal with the need to strengthen their loss reserves.
According to the Conning study, “Property-Casualty Reserve Adequacy: Truth or Consequences,” many insurers looked to be profitable by dropping rates and attracting premiums that could be invested in the surging equities markets.
In doing so, they paid little attention to loss reserve adequacy. Despite the fact that loss reserves are the largest liability on insurers’ balance sheets, most stakeholders (employees, regulators, investors and agents/brokers) do not take the time to critically examine their adequacy. However, rising loss costs and a weaker investment environment have refocused insurers on underwriting profitability and have caused more focus on loss reserve adequacy.
While Conning is optimistic about the longer-term industry outlook, the effects of Sept. 11, the economic downturn and the very litigious environment will seriously challenge the industry. The survival of some insurers and reinsurers may well depend on their ability to accurately reserve and appropriately price.