Property/casualty industry prior-year loss reserves have developed favorably for seven straight calendar years, according to a report from Fitch Ratings, which also said the industry’s reserve position remains adequate overall.
Fitch Ratings found the industry reserve position to be adequate at year-end 2012, and noted that prior-year takedowns have continued for seven consecutive years.
Only the product liability, workers’ compensation, commercial automobile liability and commercial multiple peril lines have shown signs of deficiency based on Fitch’s analysis of year-end 2012 reserve levels.
For all lines taken together, reserve takedowns for accident-year 2011 and prior during calendar-year 2012 shaved 2.3 points off the calendar-year 2012 industry loss ratio. During calendar-year 2011, the comparable figure was 3.0 points. Both measures exclude the effects of losses emerging from mortgage and credit crisis-related claims in the mortgage and financial guaranty lines.
Overall, Fitch estimates that year-end 2012 reserves for losses and loss adjustment expenses related to the last 10 accident years (2003-2012) were between $6 billion and $15 billion redundant based on an analysis of data contained in Schedule P of statutory financial statements.
In addition, Fitch estimates reserve deficiencies for asbestos and environmental using a survival ratio approach (total reserves divided by three-year average paid losses with a target level of between 11x and 14x for asbestos and 8x and 10x for environmental). Including asbestos, environment and other latent exposures, the range of reserve adequacy extends from $9 billion redundant to $11.5 billion deficient. Expressed as a percentage of total held reserves, this corresponds to 1.4 percent redundant at the low end to 1.9 percent deficient at the high end.
Fitch’s reserve adequacy estimate breakdown is as follows:
- Accident years 2003-2012/all lines: $6 billion-$15 billion redundant.
- Accident years 2003-2012/medical malpractice: more than 5 percent redundant.
- Accident years 2003-2012/other liability-occurrence, private passenger auto liability: 0-5 percent redundant.
- Accident years 2003-2012/assumed reinsurance, homeowners, other liability-claims made: adequate.
- Accident years 2003-2012/commercial auto liability, commercial multiple peril: 0-3 percent deficient.
- Accident years 2003-2012/product liability, workers comp: 0-5 percent deficient.
- Asbestos exposures: $2.5 billion-$9.5 billion deficient.
- Environmental losses: $1.5 billion-$3 billion deficient.
- Other latent exposures: $2 billion-$5 billion deficient.
Citing examples such as lead paint, pharmaceuticals, climate change litigation and nanotechnology, Fitch said its estimate for “other latent exposures,” while “unscientific,” is based on the belief that the industry does not fare well in its ability to predict new major latent loss exposures—making it likely that prior underwriting years will develop unfavorably. Overall, Fitch estimates that year-end 2012 reserves for losses and loss adjustment expenses related to the last 10 accident years were between $6 billion and $15 billion redundant.
Providing more insight into line-by-line reserves for accident years 2003-2012, the Fitch report includes charts of paid-to-incurred ratios and IBNR-to-incurred ratios (incurred but not reported). For most lines, these charts reveal a decreasing level of conservatism with respect to recent accident years. In other words, the paid-to-incurred ratios are higher for recent accident years than for 2003-2006, and IBNR-to-incurred ratios are lower.
Fitch noted that the other liability-occurrence line is an exception, with more conservatism in recent years. Also, for many of the remaining lines, the accident-year 2012 paid-to-incurred ratio is lower (more conservative from a reserving standpoint) than accident-year 2011.
Overall, even though Fitch’s most pessimistic industrywide loss deficiency estimate is less that 2 percent of total reserves, the Fitch report included stress test results at 10 percent and 25 percent deficiencies, concluding that the industry capital position could sustain these more significant deficiencies.
This article originally appeared on CarrierManagement.com, the new site for property/casualty insurance executives.