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

U.S. property and casualty loss reserves remain within anadequate range as of year-end 2010, and the potential for largedeficiencies emerging in the near-term is limited, according to aFitch analysis.

But Fitch notes that while favorable reserve development trendshave continued based on strong underwriting profitability from theprevious hard market, that level of favorable reserve development“appears unsustainable.” Fitch says that “incurred losses foraccident years 2008-2010 are less likely to develop redundantlyover time as prior hard-market underwriting periodsexperienced.”

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

Fitch says itestimates that loss reserves for the 10 most-recent accident yearswere redundant at year-end 2010 by $6 billion to $16 billion, whichis moderately lower than Fitch's year-end 2009 estimate.

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

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

Looking at individual lines, Fitch says, “The biggest change inreserve adequacy in recent years has taken place in the workers'compensation lines, which currently looks deficient. Other segmentsthat are estimated to be understated in aggregate are productliability–occurrence, and to a lesser degree, commercialmultiperil.”

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

Separate from the accident-year losses, Fitch individuallyconsiders reserves for asbestos, environmental and other long-tailclaims derived from accident years prior to 2000. Factoring inthese figures, Fitch projects that the industry's net loss andloss-adjustment expense reserves fell in a range of $10.2 billionredundant to $8.7 billion deficient as of year-end 2010. Theresults, Fitch says, are similar to 2009 estimates as the declinein accident-year redundancy is offset by a modest drop in estimateddeficiency for various latent liability losses.

“Prior-period reserves have developed unfavorably in each of thelast 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 andproduct liability–occurrence.

Asbestos-related claims filings have stabilized compared to theearly 2000s, Fitch says, but the rating agency notes that AmericanInternational Group's Chartis and Hartford Financial ServicesGroup, Inc. recently increased asbestos reserves.

Fitch says environmental reserves “continue to shift lower forthe industry as paid losses continue to outpace incurredlosses.”

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

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