Worst Is Over: Most of Casualty Reserve Hole May Be Filled, Analyst Says

By | April 15, 2024

Predictions that the property/casualty insurance industry is in the midst of repeating the type of loss reserving cycle that accompanied the hard market of the beginning year of this century may be overblown, according to an analyst.

In fact, William Wilt, president of Assured Research, believes that “much (but not all) of the financial hole the industry had dug for accident years 2016-2019 has now been filled.” The industry analyst and Fellow of the Casualty Actuarial Society delivered the assessment as part of his firm’s analysis of the year-end 2023 carried loss reserve position for the P/C insurance industry, which Assured Research puts at roughly $11.7 billion redundant in a new report titled, “P&C Loss Reserves: Keep Calm and Carry On.”

While that’s about half the redundancy Assured Research estimated for year-end 2022, for some well-reserved individual lines of business, including workers’ compensation and short-tailed property, estimated reserve redundancies are even bigger for year-end 2023 than they were for year-end 2022. (Editor’s Note: The Assured Research analysis is limited to the last 10 accident years.)

Like the year-end 2022 study, the Assured Research analysis for year-end 2023 puts the biggest deficiencies in the liability reinsurance, commercial auto liability and other liability insurance-occurrence lines. But the latest annual report notes that the industry added some $8 billion to loss reserves for these two “most problematic lines.”

“We believe a substantial portion of the adverse development expected on the problematic accident years of 2016-2019 is now behind us,” Wilt wrote in the Assured Research report, which starts with a comparison of adverse development in the other liability-occurrence line that emerged for accident years 1997-2002 during the previous hard market and expected development for accident years 2015-2019, showing a better picture for the more recent years. A graphic in the report notes, for example, that accident year 1999 ultimately had 31 loss ratio points of adverse development. In contrast, the worst year of among the 2015-2019 accident years – 2017 – is only expected to develop by 13 points, according to Assured Research’s latest estimates.

Bottom line, there is still some development left in those problematic 2016-2019 accident years that executives at companies like AXIS Capital, Markel Corp., Everest Group, and Swiss Re, among others, have been talking about on earnings conference calls.

But for other liability-occurrence, what is yet to come will not put the industry back into “a 9/11-era reserving cycle,” according to Assured Research.

“We expect more adverse development for the line but we also believe the worst is over,” the report says.

In addition, Assured Research doesn’t estimate “that the industry in commercial auto has meaningfully more reserve charges to take” for the problematic accident years, Wilt said on an audio digest he recorded to summarize the report findings for subscribers to his firm’s research.

Still, there are some problems ahead for commercial auto insurers. “It just looks bad,” he said, referring instead to concerns about the 2021, 2022 and 2023 accident years, which look to be “short by some five percentage points.”

“That’s a problem not just from a reserving perspective, but also from a pricing perspective,” he said, contrasting other liability where Assured Research’s ultimate loss ratio estimate for accident year 2023 almost matches the industry aggregate ultimate loss ratio.

The report presents incremental reported loss ratio histories by accident year and development period (triangles), along with commentary, for seven of the 17 lines of business Assured Research studied – workers’ comp, property insurance, other liability (claims made and occurrence), private passenger auto liability, liability reinsurance and commercial auto liability.

While Assured Research estimates deficiencies of about $3 billion for both the private passenger auto liability and liability reinsurance lines, that shortfall for private passenger auto liability represents less than 2% of carried reserves for the line. For liability reinsurance, it’s more than 8%.

Throughout the report, Assured Research refers to the impacts of economic and social inflation on loss costs, and the pricing implications of reserve positions by line. On a “technical commentary” page of the report and in the audio digest, Wilt revealed that his firm has made explicit, conservative adjustments for inflationary impacts that “may not be baked into loss development factors” already.

The conservatism probably added $18.6 billion of indicated reserves (across all impacted lines) to the analysis, he noted.

Separately, analysts at Morgan Stanleyhave estimated that social inflation added $13.3 billion-$24.5 billion of excess losses to the commercial auto liability line – or 7%-13% of industry commercial auto losses from 2013-2022.

Topics Casualty

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Insurance Journal Magazine April 15, 2024
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