Reserve Deficit Down to $30B: Moody's

Reserve Deficit Down to $30B: Moody's

NU Online News Service, Sept. 5, 2003, 9:30 a.m. EDT?With $11 billion of adverse development recorded in 2002, the property-casualty industry's loss reserve deficiency stood at about $30 billion at year-end 2002, according to Moody's Investors Service.

In a preview written by the study's author, Sarah Hibler, for National Underwriter, the Moody's vice president and senior credit officer noted that the indicated deficiency of roughly $30 billion as of Dec. 31, 2002 is about 10 percent of carried reserves for claims other than those related to asbestos and environmental exposures and excluding reinsurance lines. The preview will be published in NU's Sept. 8 print edition.

Ms. Hibler writes: "Despite substantial prior accident year reserve strengthening by many primary insurers and reinsurers in the past two years, Moody's believes that the industry's loss reserves for these lines of business remain inadequate."

"That said, it does appear, in retrospect, that year-end 2001 marked the low point of the industry's reserve adequacy. Our analysis suggests that the level of reserve adequacy had improved somewhat by year-end 2002, as the benefits of a favorable pricing environment, tighter terms and conditions, a low level of catastrophes and additions to prior-year reserves combined to strengthen individual companies' balance sheets."

Moody's estimate is based on both a top-down approach, (industry aggregate by line of business) as well as a bottom-up approach (analyzing the Top 25 U.S. p-c groups).

Ms. Hibler noted that the reserve inadequacy, far from being uniformly distributed throughout the industry, is predominately being borne by commercial insurers which have almost the entire share of the inadequacy. Personal lines insurers essentially occupy a range from breakeven to modestly deficient, while diversified companies in our study can all be characterized as modestly deficient in their reserve adequacy, she said.