The U.S. property/casualty industry has an estimated reserve deficiency of between $46 billion and $77 billion at year-end 2002, a figure which is equal to between 10 percent and 17 percent of total reserves and between 16 percent and 26 percent of reported surplus, according to a new report published recently by Fitch Ratings.
These deficiencies lead to material overstatements in statutory capital and the recognition of deficiencies over time will create a substantial drag on future earnings for the industry similar to what has already occurred in 2001 and 2002, Fitch said in its report. In a few extreme cases, Fitch noted, the solvency of individual insurers may be suspect due to reserve deficiencies.
Fitch estimates that incurred losses from asbestos related exposures were $9.3 billion in 2002 and $4.1 billion in 2001. Fitch believes that ‘shock losses’ related to asbestos reserve increases will continue over the near term as more insurers complete a ‘ground-up’ reserve study that incorporates the recent claims and settlement trends. The magnitude of other firms’ charges following the ground-up asbestos review has created strong pressure from the investment community for more complete disclosure of asbestos exposures by firms that have yet to complete a more rigorous study.
The new report, “Property/Casualty Insurance Reserves at Year-End 2002: Filling in the Hole —Slowly,” can be found on Fitch’s Web site.