U.S. Industry Reserve Redundancy at $22 Billion: Aon Benfield

June 16, 2011

The overall U.S. insurance industry reserve redundancy is $22.0 billion versus $21.9 billion at year-end 2009, after the industry released $10.5 billion of reserves during 2010, a new study of year-end 2010 data shows.

The study by global reinsurance intermediary Aon Benfield indicates $22.0 billion of reserve redundancy across all lines of business is split between personal lines $6.5 billion, commercial property $1.5 billion, commercial liability $9.9 billion, and workers’ compensation $6.5 billion, offset by a deficiency in financial guaranty of $2.4 billion.

Aon Benfield estimates that $9.8 billion of favorable development will emerge in 2011. At the current run-rate the redundancy will be eliminated in 2.2 years.

Last year’s study split the $21.9 billion reserve redundancy as personal lines $6.0 billion, commercial property $3.8 billion and commercial liability $14.2 billion, offset by deficiencies of $0.8 billion in workers’ compensation and $1.4 billion in financial guaranty. It predicted that favorable development would emerge at $9.5 billion per year, giving 2.3 years of further releases at the current run rate. In fact, carriers released $10.5 billion of total reserves during 2010.

Financial guaranty showed $0.4 billion favorable development during 2010, compared to $7.0 billion favorable development in 2009, but $12.6 billion adverse development in 2008. The overall reserve position for financial guaranty is now $2.4 billion deficient, compared to an indicated deficiency of $1.4 billion in the 2009 study.

Stephen Mildenhall, chief executive officer of Aon Benfield Analytics, said the study confirms that there is “still a headwind against a broad market hardening from continued reserve releases.”

He said that in the first quarter 2011, public companies released a further $4.6 billion of reserves compared to $5.7 billion in 2010. “These releases reflect good loss experience from the hard market years and continued favorable frequency trends across all liability lines in the U.S.,” Mildenhall said.

The study is based on an analysis of U.S. statutory Schedule P triangles. It builds up the total industry position from a by-line analysis.

AIG, which represents 10 percent of total U.S. statutory reserves, published additional disclosures outlining adjustments to its statutory Schedule P triangles in its recently filed combined annual statement. These adjustments cover large portfolio transfers, reinsurance commutations and additional line of business splits, all of which can cause material distortions to the mechanically generated indications. To incorporate the effect of these disclosures on the industry reserve position, Aon Benfield Analytics separately analyzed the industry excluding AIG and the disclosure-adjusted AIG triangles to derive a total industry view.

While the estimated redundancy for the industry is $0.1 billion higher than the 2009 estimate (despite $10.5 billion released in 2010) without adjusting for AIG’s Schedule P disclosures the estimated redundancy for 2010 would be reduced to only $13.9 billion. AIG’s disclosures have the greatest impact on workers’ compensation, where they account for most of the shift from $0.8 billion deficiency in 2009 to the $6.5 billion redundancy in 2010. AIG represents 13 percent of the industry workers’ compensation reserves.

Source: Aon Benfield

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