While insurance industry earnings are suffering through a soft market cycle, industry reserve adequacy remains one bright spot for insurers, according to a report from Fitch Ratings.
Examining the past 10 years, Fitch said the industry has built up a modest reserve redundancy for the end of last year, but that reserves will decline in the years to come. The hard market accident years (2003-2006) are likely to continue to develop redundantly, while the soft market accident years (1998-2001) are largely paid out.
"In the near term, calendar-year earnings will continue to benefit from favorable reserve development from prior underwriting periods, but accident-year loss ratios are likely to increase materially from prior years as market conditions erode further," Fitch said.
Overall reserve redundancy is estimated to be between $900 million and $9 billion.
Analyzing individual components of the reserve position, Fitch estimates:
o For accident years 1998-2007, the industry reserve position stands at $17.4 billion to $18 billion redundant.
The rating service said this is a strong improvement over five years ago, at the end of 2002, when the loss reserves for 10 prior years were placed at $32 billion to $38 billion deficient.
o Asbestos exposures stand between $4.7 billion and $9.3 billion deficient, and environmental exposures are $2.3 billion to $3.2 billion deficient.
Asbestos claim filing was described as relatively stable since 2004, adding that there are signs the worst may be over. Losses in 2007 were $2.4 billion and $1.6 billion in 2006, down significantly from 2001-2005 periods. Five companies incurred asbestos losses in excess of $100 million, from six in 2006 and nine in 2005.
Overall, the positive reserve development trend is expected to continue for the near term, but positive development is expected to narrow as the soft market continues.
The uncertainty surrounding reserving results is compounded by monetary inflation, "which adds further difficulty in estimating loss costs, particularly in longer-tail business lines," Fitch said.
The full report is available at www.fitchratings.com.
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