Fitch: Reserves Remain Adequate, But Recent Years Unlikely to Develop Redundantly

Looking forward, Fitch says it expects a continuation of loss-reserve stability due to the economic environment and steady loss-cost trends. Looking forward, Fitch says it expects a continuation of loss-reserve stability due to the economic environment and steady loss-cost trends.

NU Online News Service, Aug. 23, 1:45 p.m. EDT

U.S. property and casualty loss reserves remain within an adequate range as of year-end 2010, and the potential for large deficiencies emerging in the near-term is limited, according to a Fitch analysis.

But Fitch notes that while favorable reserve development trends have continued based on strong underwriting profitability from the previous hard market, that level of favorable reserve development “appears unsustainable.” Fitch says that “incurred losses for accident years 2008-2010 are less likely to develop redundantly over time as prior hard-market underwriting periods experienced.”

Still, Fitch says that the industry has benefited from stable loss trends, and while 2008-2010 experienced weaker underwriting performance, reserve experience in aggregate for the 2008 and 2009 underwriting periods “defied expectations” by developing favorably, at least so far.

Industry Reserves by Line of BusinessFitch says it estimates that loss reserves for the 10 most-recent accident years were redundant at year-end 2010 by $6 billion to $16 billion, which is moderately lower than Fitch’s year-end 2009 estimate.

The rating agency says it arrives at this estimate by using a reserve adequacy model that projects ultimate accident-year losses on a paid and case-incurred basis by business line for 2001-2010. Fitch says its analysis shows a reduction in the estimated redundancy for accident year 2003-2007, while the more recent soft-market accident years of 2008-2010 are “reserved more likely at adequate levels.”

The estimate for 2008-2010 is more optimistic than a recent Keefe, Bruyette & Woods analysis, which contends that accident years 2008-2010 show total deficiencies of $6.4 billion: $3.44 billion in 2008, $1.4 billion in 2009 and $1.54 billion in 2010.

Looking at individual lines, Fitch says, “The biggest change in reserve adequacy in recent years has taken place in the workers’ compensation lines, which currently looks deficient. Other segments that are estimated to be understated in aggregate are product liability--occurrence, and to a lesser degree, commercial multiperil.”

Medical malpractice--claims made and occurrence, as well as “other liability--occurrence” were shown to be the most redundant lines, according to Fitch. Private passenger auto liability was listed as slightly redundant, while homeowners' and commercial auto liability were adequate.

Separate from the accident-year losses, Fitch individually considers reserves for asbestos, environmental and other long-tail claims derived from accident years prior to 2000. Factoring in these figures, Fitch projects that the industry’s net loss and loss-adjustment expense reserves fell in a range of $10.2 billion redundant to $8.7 billion deficient as of year-end 2010. The results, Fitch says, are similar to 2009 estimates as the decline in accident-year redundancy is offset by a modest drop in estimated deficiency for various latent liability losses.

“Prior-period reserves have developed unfavorably in each of the last 10 years, averaging $5 billion annually for the industry,” Fitch says. The prior-period reserves are concentrated in workers’ comp, general liability occurrence, reinsurance--liability and product liability--occurrence.

Asbestos-related claims filings have stabilized compared to the early 2000s, Fitch says, but the rating agency notes that American International Group’s Chartis and Hartford Financial Services Group, Inc. recently increased asbestos reserves.

Fitch says environmental reserves “continue to shift lower for the industry as paid losses continue to outpace incurred losses.”

Looking forward, Fitch says it expects a continuation of loss-reserve stability due to the economic environment and steady loss-cost trends.

“Fitch continues to believe that the greatest threat to maintaining adequate loss reserves going forward is an unexpected shift in inflation/interest rates, or loss-cost factors that more-specifically influence insurance claims costs, such as medical costs, litigation settlements, or social inflation.”

About the Author
Phil Gusman,

Phil Gusman,

Phil Gusman is Managing Editor of Prior to joining National Underwriter in 2008, he was Editor of Insurance Advocate. Gusman has also served as Associate Editor of Crackdown!, an insurance fraud publication, and Assistant Editor of Empire State Report, which covers New York politics. He graduated in 2002 from Plattsburgh State University in New York. Gusman may be reached at Follow him on Twitter: pgusman and PC360_Markets


Resource Center

View All »

Is It Time To Step Up And Own An Agency?

Download this eBook for insight on how to determine if owning an agency is right...

Claims - The Good The Bad And The Ugly

Fraudulent claims cost the industry and the public thousands of dollars in losses. This article...

Leveraging BI for Improved Claims Performance and Results

If claims organizations do not avail themselves of the latest business intelligence (BI) tools, they...

Top 10 Legal Requirements for E-Signatures in Insurance

Want to make sure you’ve covered all your bases when adopting e-signatures? Learn how to...

Get $100 in leads with $0 down!

NetQuote's detailed, real-time leads have boosted sales for thousands of successful local agents across the...

The Growing Role of Excess & Surplus Lines in Today’s...

The excess and surplus market (E&S) provides coverage when standard insurance carriers cannot or will...

Increase Sales Conversion with this Complimentary White Paper

This whitepaper will share proven techniques - used by many of the industry's top producers...

D&O Policy Definitions: Don't Overlook These Critical Terms

Unlike other forms of insurance where standard policy language prevails, with D&O policies, even seemingly...

Environmental Risk: Lessons Learned from Willy Wonka and the Chocolate...

Whether it’s a chocolate factory or an industrial wastewater treatment facility, cleanup and impacts to...

More Data, Earlier: The Value of Incorporating Data and Analytics...

Incorporating more data earlier in claims lifecycles can help you reduce severity payments by 25%*...

PropertyCasualty360 Daily eNews

Get P&C insurance news to stay ahead of the competition in one concise format - FREE. Sign Up Now!

Advertisement. Closing in 15 seconds.