With a portion of the industry's underwriting profit for 2006 attributable to $7 billion in reserve takedowns, it's fair to ask whether reserves carried overall are now adequate to cover losses that have occurred.
Are they redundant–more than adequate to cover such losses–leaving some fat for future profit taking? Or are they deficient, falling short of levels needed for ultimate claims payouts?
Recent reports by industry experts suggest that in spite of takedowns in 2006, reserve redundancies remain for the industry overall.
In a report published in June, for example, Hartford-based Conning Research & Consulting estimated the reserve position for casualty lines has changed from a deficiency of 4.3 percent of carried loss reserves at year-end 2004 to a redundancy of 5.3 percent of carried loss reserves at year-end 2006.
For individual lines, Conning estimates that as of year-end 2006:
o Private passenger auto liability reserves are redundant by 2.2 percent of carried reserves
o Homeowners reserves are redundant by 4.8 percent–a dramatic swing from a 10.9 percent deficiency at year-end 2001.
o Workers' compensation reserves are redundant by 4.6 percent–reversing a 4-10 percent deficiency estimated at year-end 2004.
o Commercial multiperil reserves may be mildly deficient, while other-liability is redundant by 6 percent.
o Medical malpractice reserves are redundant by 20 percent–a far cry from the 25 percent deficiencies estimated during 2000 through 2002.
Separately, analysts at Morgan Stanley in New York, analyzing year-end results for large, publicly traded insurers back in February, said reserve releases fell short of their expectations.
More recently, in a May research note, Morgan Stanley analyst William Wilt wrote: "Five years ago, we put the industry's core reserve shortfall at $65 billion," referring to reserves for losses other than environmental and asbestos claims.
"About $50 billion of adverse development later, we're ready to say that redundancies reign supreme," he continued, estimating a reserve redundancy of roughly $18 billion–or 5 percent of carried reserves for accident years 1997-2006.
For asbestos, Mr. Wilt noted that "massive reserve charges over the 2001-2004 time frame and a dramatically improved legislative/legal environment have relegated that issue to the back of the stove" for a few years, also predicting that environmental liabilities will "eventually rise out of the swamps and into the boardroom," but not soon.
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