Analysts agree that a drop in P&C reserve releases is inevitable as years of soft-market pricing catch up with loss realities—and one report questions 2011 releases from recent accident years for longer-tail commercial lines.

A string of recent reports indicates that while strong reserve releases are continuing for the time being, the industry is close to depleting its reserve cushion.

Based on figures from the National Association of Insurance Commissioners (NAIC) and aggregated by SNL Financial, Aon Benfield performed an actuarial study of company reserve releases and estimates that insurers will release between $7 billion and $10 billion this year to bolster current-year results, which will eliminate remaining reserve redundancy.

Aon Benfield’s analysis coincides with a report late last month from insurance-ratings agency A.M. Best that said the reserve cushion after industry releases in 2012 will most likely be exhausted due to soft-market pricing in recent years. 

In another report, Stifel Nicolaus said the industry is “flirting with inadequacy.” According to that report, consolidated reserves stood at $573 billion—just $5 billion above what the firm considers a sufficient reserve level.

Ratings agency Standard & Poor’s took it a step further, analyzing reserves that were released in 2011 and questioning whether reserves from recent accident years were released prematurely.

In a report, S&P says the industry released $13 billion in reserves in 2011 (up from $10 billion in 2010) as the industry responded to heavy losses in the first half of the year.

S&P suggests that insurers have been releasing reserves for long-tail commercial lines for accident years 2008, 2009 and 2010—which the ratings agency says may be an imprudent move on the part of insurers.

S&P says reserve releases increased across most types of commercial-insurance business irrespective of the liabilities’ duration: “As of Dec. 31, 2011, almost all commercial lines had released reserves from accident-years 2008-2010. The exceptions were the Workers’ Compensation and, to a lesser extent, Product Liability lines, which actually strengthened their reserves modestly in 2011.”

S&P continues, “A common-sense approach calls for cautious and conservative reserving for recent accident years, especially for long-tail commercial lines, because of the inherent volatility of these businesses and the difficulty of projecting future claims at an early stage of reserving.”

In an analyst’s note, Stifel Nicolaus says at least one major commercial insurer, State Farm, is in a strong reserve position—which may restrain the carrier from seeking aggressive rate increases.

Stifel Nicolaus reports the Bloomington, Ill.-based insurer has $30.9 billion in stated statutory loss reserves, a figure calculated by the analyst firm based on data from the NAIC released through SNL Financial.

The firm says State Farm’s reserve strength can “sustain strong reserve releases” and, given State Farm’s immense size in the market, “could also dampen pricing, which is a clear negative for the industry.”


In a statement, Stephen Mildenhall, CEO of Aon Benfield Analytics, says recent strong reserve releases have created a “headwind” against a broad market hardening, a trend that has continued into 2012’s first quarter with insurers releasing an additional $4.2 billion in reserves. He adds, though, that “the forecast is for the winds to abate over the next four to six quarters.”

Ultimately, for all of the discussion and analysis, experts’ reserve evaluations amount to a best guess based on the extent of their calculations.

Brian Alvers, Aon Benfield’s head of Americas Actuarial, points out that despite the loss activity during the first half of 2011, no one knows what insurers will actually book and there is no telling if reserves will be deficient or not for that period.

David Paul, principal with ALIRT Insurance Research, says that while analysts’ conclusions are indeed based on estimates calculated from available data, “from a broad perspective, they are directionally correct” in concluding that reserves are beginning to diminish.

That reality, however, may not translate into a hard market. “There could be enough surplus in the industry to make up for [deficiencies] and not damage the industry’s balance sheet,” says Paul.

He adds that no company is in the business to lose money, but an insurer might decide that it’s in its best interest to use surplus to gain market share instead of directing it toward reserves—“but it’s difficult to say what will happen.”

— With Anya Khalamayzer