The insurance industry was hit hard in 2017. Catastrophicweather events struck like never before, cyber attacks were on therise, and the insurance industry had to withstand it all.

As we near the halfway point of 2018, it's important to lookback at the previous year and see how the insurance industry isdoing financially. There are no guarantees in 2018, and theindustry would be wise to be prepared for a number ofscenarios.

Morgan Stanley recently released a reportanalyzing the property & casualty insurance industry froma financial perspective. Their proprietary annual actuarialanalysis of industry reserves reveals a $4.3 billion deficiency in2017, and they've reduced their 2018-2019 reserve estimates by 3-5%on average.

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Morgan Stanley estimates an actuarially reasonable range ofreserves between $605.8 billion and $633.7 billion. Their analysisshows an overall deterioration of $1.8 billion year-over-year withthe bulk of the deterioration concentrated in Other LiabilityOccurrence and Other Liability Claims-Made.

Morgan Stanley also estimates that five of the top six industryreserves lines to be deficient, including: Workers' Compensation(23% of carried reserves; $449 million deficient), Personal AutoLiability (18%; $58 million), Other Liability Occurrence (14%; $6.4billion), Other Liability Claims-Made (6%; $2.9 billion) andCommercial Auto Liability (5%; $1.5 billion).

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Workers' comp, short-tailed lines key to development

Of the $12 billion of favorable development (excluding AIG),$11.3 billion came from two distinct sources: Workers' Compensation($5.1 billion) and short-tailed lines ($6.2 billion). While somelines are more at risk than others (specifically, Other Liabilityand Commercial Auto Liability), Morgan Stanley notes again that theoverall industry reserve position remains a function of thoseshort-tailed lines.

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Expect slower reserve releases

In Morgan Stanley's view, large industry reserve releases arenot sustainable. For example, the sustainability of largereserve releases from short-tailed lines and Workers'Compensation — of the line's $5.1 billion of favorabledevelopment in 2017, $1 billion came from the most recent accidentyear — could be challenged by modest pricing and a potentialuptick in loss cost inflation.

There have been instances of adverse development at individualcarriers and select lines — Personal and Commercial Auto, forexample — in recent periods. Morgan Stanley predictsheightened earnings risk from lower reserve releases or evenbalance sheet risk from reserve charges for the industry.

After record catastrophe losses in 2017, the industry seesimproving commercial P&C pricing. The “silver lining” ofworsening reserves is that they could strengthen the case forfurther rate increases. But much of 2018 remains to be seen, andhow the P&C insurance industry plans to leverage its financialstanding will be critical to its future successes.

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