P-C Reserves Seen Strong With Some Deterioration

While property-casualty reserves remained strong in 2007, signs have pointed to some deterioration in the industry’s reserve position, according to a new Conning Research and Consulting Inc. study.

Their report, “Property-Casualty Loss Reserves: Thinner, But is the Tail Getting Fatter?” states that overall industry loss reserve adequacy remains positive, and even improved slightly, but it adds that “with a closer look at reserves aged more than 10 years, we see a need for additional strengthening in some lines of business, particularly in the reserves carried for those older years.”

For core reserves in the most recent 10 accident years, the study reports that reserves “appear redundant by about 8 percent in 2007,” which is up from 6.4 percent in 2006.

While lines such as commercial auto, medical malpractice and personal lines showed “strong evidence for redundancy,” according to the study, deterioration of reserves emerged in workers’ compensation and commercial peril.

Much of the redundancy, says the study, is found in accident years from 2004-2007 despite “considerable releases in reserves over the past two years, primarily from these most recent accident years.” The strong redundancy could be connected to strong pricing dating back to 2003, according to the study.

But the study says that emergence of adverse development for accident years more than 10 years old, called the “tail,” is “persistent.” The study states, “The weight of loss reserves in older years is definitely increasing as a percentage of the total.”

Accident years five years and older, adds the study, made up more than 27 percent of all reserves in 2007, compared to 24 percent in 2002-2004.

In general, the study notes that rate increases and economic conditions have provided the necessary funds for reserve strengthening in recent years. “Over the past five years, premiums have grown significantly faster than losses in most lines of business,” Conning found.

For the last two years, though, the report points out that premium growth has slowed. But over this same period the growth in paid losses has also slowed, due in part to decreases in frequency and possibly increases in deductibles and other loss retention programs.

“As a result,” notes the study, “the loss reserve position has remained strong, and even improved in some lines of business from our previous review.”

The report explains that insurers are usually able to strengthen loss reserves during profitable parts of the underwriting cycle. When pricing erodes, it observes, reserve releases are used to support earnings for a time.

“The industry has been releasing reserves and may have the opportunity to release some more,” the study says. “However, with adverse development in older years and softening pricing and decreasing redundancy in recent years, this part of the cycle may be coming to an end.”