Thinner P&C Reserve Cushions Could Push Prices Higher

NU Online News Service, July 27, 3:45 p.m. EDT

Property and casualty insurance companies may be forced to raise prices soon as increased harvesting of reserve redundancies is expected to leave a limited cushion for 2009, according to a recent Moody's report.

The report, "U.S. P&C Insurers Reap large Reserve Redundancy," stated: "The U.S. p&c industry has largely harvested reserve redundancies embedded in the balance sheet at year-end 2007 through earnings in 2008, thus leaving limited cushion for 2009. Moreover, pricing has continued to decline over the last several years, causing accident year loss ratios to migrate higher."

Moody's said during 2008, the p&c industry posted nearly $14.3 billion in favorable reserve development, or about 2.8 percent of prior year-end carried reserves, representing the fourth straight year of favorable reserve releases for the industry.

Improvement over prior years stemmed from more favorable market conditions, price increases, better underwriting discipline, favorable loss cost trends, and relatively few natural catastrophe losses in 2006 and 2007, Moody's said.

But the rating agency added that it expects companies to report less benefit in their 2009 earnings from reserve releases and, in some cases, to even post deficiencies.

As a result, the report said "current results suggest that over the medium term, insurers will have little choice but to raise prices or to see their combined ratios continue to migrate higher."