Industry Finding Ways to Extend Earnings Support from Reserve Releases

While insurers continued to release reserves in 2012, the industry's reserve position remains “modestly redundant” and slightly stronger than in 2011 a new report says, likely thanks to rate increases and muted claims activity.

In its review of reserves at year-end 2012, Conning Research and Consulting says in its latest report, “2012 Property-Casualty Loss Reserves,” that in the “core casualty lines of business reviewed, the indicated redundancy is about 4.2 percent of reserves, compared to a 2.6 percent redundancy estimated at year-end 2011.”

Conning says reserve releases in 2012 totaled $10.5 billion, on par with releases seen in 2011, “but a bit more came from property and property-related lines such as homeowners.”

But despite these releases, the industry's reserve position improved, and Conning says that may be the result of premium growth from increasing rates and lower claims due to the recent recession and weak recovery.

Stephan Christiansen, managing director at Conning, says in a statement, “The insurance industry appears to have found the ability to extend earnings support from loss reserve releases beyond where we would have expected this part of the reserve cycle to have been tapped out. In that sense, it feels a little like the oil and gas industry's discovery of 'fracking.'

“These releases and continued reserve strength appear to be supported by improved margins from increasing premiums and a reduction in incurred losses, under assumptions that claims settlement patterns will continue apace. Of course, claims patterns can change as the economy changes.”

Adverse development for accident years prior to 2003 amounted to $2 billion in 2012. Conning says, “Most of this adverse development could be found in 'other liability,' and may relate to asbestos and environmental claims. Casualty loss reserves also are subject to continuing pressure from medical inflation and potential adverse litigation trends.”

Even with the apparent good news for carriers with respect to reserves, Conning warns, “With narrow margins in existing redundancies and with accident-year loss ratios generally rising in recent years, loss development patterns and emergence of claim settlement patterns must be monitored very closely if the industry is to avoid falling into another period of extended reserve deficiencies, as last seen in the first part of the past decade.”

Others have noted that the reserve well cannot continue to support earnings forever. In March, a Moody's analysis of U.S. insurers' performance in 2012 noted that while reserve releases in 2012 generally continued to support earnings, some insurers reported adverse development, particularly in workers' comp and other long-tail casualty lines. For 2013, Moody's predicted reserve releases to continue to taper. 

Conning's report analyzes reserves by line. The report finds:

• Private passenger auto liability industry reserves were potentially redundant in 2012 by 7.2 percent of carried loss reserves, about the same as 2011. 
• Homeowners at year-end 2012 was potentially redundant by 10 percent of reserves, after an apparent slight deficiency as recently as 2009.
• Workers' comp may have ended 2012 slightly deficient by about 1.2 percent of carried reserves, compared to an estimated deficiency of 6 percent of carried loss reserves in 2011. The industry released workers' compensation reserves in 2012 by $212 million, compared to a slight strengthening of $240 million in 2011.
• Commercial multiperil is estimated by Conning to be slightly deficient at about 0.5 percent of reserves, compared to a slightly greater deficiency estimated one year ago at about 3.7 percent of reserves.
• Conning estimates the reserve position for other liability lines to be potentially redundant in the range of 4 percent of reserves, compared to a 2011 redundancy of 5 percent of reserves. 
• The reserve position for commercial auto liability as of 2012 “appears to have eroded to a modest redundancy at 0.5 percent of reserves—essentially break-even,” says Conning.