Conning: Reserve Problems At P-C Insurers

Titled "Property-Casualty Reserve Adequacy: Truth or Consequences," the 168-page report also voiced concern about what Conning called "the laxity of regulatory enforcement of data submission quality and timeliness."

Conning said that insurers were reporting consolidated data to state regulators as late as three-to-six months after the National Association of Insurance Commissioners' mandated reporting date. The report found that as of May 31, 2001, 24 percent of consolidated statement data were missing.

"Can one expect accurate loss reserves without an appropriate level of attention to timely and accurate statutory reporting?" Conning asked in the report written by Geri Riley, a Conning assistant vice president.

In a statement issued with the report, Conning said it was optimistic about the longer-term industry outlook, but added that the losses from the Sept. 11 terrorist attacks, the economic downturn, and the proliferation of lawsuits would challenge the industry.

Survival of some insurers and reinsurers, Conning said, might well depend on their ability to accurately reserve and appropriately price.

In looking at various lines, the study found the highest deficiency in the medical malpractice area, which it estimated at roughly $5 billion–or 25 percent of carried reserves.

Examining workers' compensation, Conning said it found the current deficiency in loss reserves to be slightly more than $4.5 billion, or 7.3 percent of carried reserves. Carriers should strengthen reserves in this segment because of losses from the World Trade Center disaster and increasingly adverse action by rating agencies, Conning advised.

In its statement, Conning said that in the past many insurers sought to be profitable by reducing rates and attracting premiums that could be invested in the surging equities markets, and in doing so, "they paid little attention to loss reserve adequacy."

Conning found that despite the fact that loss reserves are the largest liability on insurer balance sheets, most stakeholders (employees, regulators, investors and agents/brokers) do not critically examine their adequacy.

The report concluded that rising loss costs and a weaker investment environment have refocused insurers on underwriting profitability and have caused greater focus on loss reserve adequacy, because loss results are a key element used in pricing.

"Individual company results, particularly for a single line, are likely to differ, often dramatically, from those of the industry. There are always reasons for results being what they are," said Ms. Riley.

"Prudent insurers will carefully examine their results, whether good or bad, to identify and explain why they are better or worse than overall industry results. Insurers cannot simply accept good results and question the bad," she added.

The study is available from Conning for $950. Conning Corp., through its subsidiaries, provides asset management services to insurance companies and institutional investors, manages private equity funds investing in financial services companies, and conducts in-depth research on the financial services industry.