S&P, Insurer CEOs Concerned About Reserve Releases

NU Online News Service, June 8, 10:40 a.m. EDT

BROOKLYN, N.Y.--Rating analysts at Standard & Poor's are starting to get concerned about loss reserving activities of commercial insurers, and insurance executives are eyeing the same troubling actions, said speakers at a conference.

During the opening session of the Standard & Poor's Insurance 2009 Conference last week, Managing Director Thomas Upton said the firm is particularly concerned about the fact that insurers are taking down (or releasing) loss reserves they carry on their books for prior accident years too quickly.

The releases are material for some long-tailed casualty lines, like workers' compensation, Mr. Upton said, referring to an S&P analysis contained in a report the rating agency published in January.

The report, based on data through year-end 2007, shows that insurers took down $1.7 billion of workers' comp reserves related to accident year 2006 during 2007, while boosting reserves for prior accident years by $600 million.

Evan Greenberg, chairman and chief executive officer of ACE Limited, agreed that S&P was highlighting a legitimate area of concern, even though he believes that industry reserves levels are currently adequate in the aggregate.

Releasing reserves based on early developments is an optimist's view, Mr. Greenberg said. "Good news comes early in the casualty business. The bad news always comes late," he said.

"I do think some companies have released reserves early in an effort to goose earnings," he said. "It may come back to bite them."

In addition, Mr. Greenberg believes insurers are being overly optimistic in the initial loss ratio selections they make to set reserves for recent accident years.

"The 2008 accident year will prove in aggregate to be deficient," he asserted, noting that it's "normal within the cycle" for insurers to start pegging current loss ratios below where they'll ultimately play out.

"I don't think this one's any different, all the vigilance of third parties notwithstanding," he said.

"I agree with that," said John Charman, AXIS Capital president and CEO, referring to Mr. Greenberg's remarks during a later session.

Mr. Charman noted that while latent liability issues like asbestos that led to significant reserve strengthening in the prior decade have not reemerged, "as sure as night follows day, attritional losses sweep in seven or eight years after that business as has been written," he said. (The term "attritional losses" refers to losses other than those related to major catastrophes or exposures.)

"I've been extremely concerned about some of the companies in our industry--both on the primary side and on the reinsurance side--[with regard to] their overly optimistic assumptions for loss [ratio] picks, as well some pretty staggering early releases of reserves on casualty business," he said, noting that the takedowns are coming just three or four years after insurers put them up.

He added that he has begun to see a little bit of emergence [or] attritional activity coming back from the 2002 and 2003 underwriting years in industry data.

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