Analysts Weigh In On Reserve Concerns

"Given the history of the industry, yes, [insurers] probably underreserved" for that year, Mr. Cohen said, adding, however, that his firm's analysis indicates industry reserves are sufficient overall. "At this point, it doesn't look like there are any holes in any insurer balance sheets jumping out."

"There are signs things are changing," he said, pointing to two key indicators of falling reserve levels–increasing paid-to-incurred loss ratios and falling ratios of IBNR-to-incurred losses. (Incurred losses are paid losses plus reserves. IBNR refers to the portion of loss reserves established for incurred-but-not-reported claims.)

"When you look at the actual adequacy of the overall reserve positions, right now, it doesn't look so bad," he said. But "at this point, nothing would surprise me, given the history of the industry."

"Surprise" was exactly the word an actuary used to describe his reaction to reserve strengthening numbers contained in an S&P report about reserve activity over the last 15 years. The report reveals $88 billion of reserve strengthening for accident years 1999-2005, after a period of reserve takedowns from the mid-to-late 1990s.

The surprised actuary, Michael Angelina, chief risk officer for Endurance Specialty Holdings, noted that $60 billion of that $88 billion boost came from the severely underpriced soft market years of 1998-2001.

He said that drivers of this result were inadequate pricing and poor underwriting, the aggressive use of reinsurance, and dramatic changes in terms and conditions that were not quantified in the initial loss reserve estimates.

Mr. Angelina and another actuary, Raji Bhagavatula, a principal for Milliman, spoke at a separate session devoted to p-c loss reserves.

Both actuaries suggested possible legitimate reasons for some reserve changes going on now that S&P analysts expressed concerns about throughout the conference, but nonetheless the two actuaries said they're counseling other actuaries to remain vigilant in monitoring reserves.

During the opening session of the conference, Managing Director Thomas Upton said the firm is particularly concerned about the fact that insurers are too quickly taking down (or releasing) loss reserves they carry on their books for prior accident years.

The releases are material for some long-tailed casualty lines, Mr. Upton said, referring to an S&P analysis contained in a report the rating agency published in January.

Mr. Angelina said it might make sense for reserve releases to come this early for some recent accident years if the reserves relate to exposures under claims-made casualty policies (covering only claims reported during the policy term). What would be concerning, he said, is if insurers are taking reserves down quickly on longer-tailed occurrence policies (which cover claims incurred during the policy period but potentially reported in subsequent years).

The S&P report raised specific concerns about the workers' compensation line. Based on data through year-end 2007, the report shows that insurers took down $1.7 billion of workers' comp reserves related to accident year 2006 during 2007, while boosting reserves for prior accident years by $600 million.

Ms. Bhagavatula noted that workers' comp reserves for some of the accident years being taking down were probably fat to begin with. That's because workers' comp reforms in states like California were much more beneficial than actuaries originally thought when they made their initial estimates.

"The fact that the loss ratios have come down, in itself, should not be a bad indication," she said, although she expressed concerns about what comes next.

"Reforms have a lifetime of their own. They get challenged [and] they get relaxed," she said, noting that insurers will need to keep that in mind as they are setting reserves of the current accident year.

Expressing a similar view on recent prior accident years, Mr. Angelina said, "Now is not the time to be releasing reserves, especially against the backdrop of what's happening" politically, referring specifically to a memo released by President Obama last week calling for the elimination of a federal pre-emption of product liability lawsuits.

"For 30 years, we have not had a lot of time where [there was] a Democratically controlled Congress and executive branch" in the United States. "We're now in that phase," he said.

Judicial appointments are changing and state reforms may be overturned, he added, noting that future development on recent accident years may start playing out very differently.