In its annual actuarial analysis of industry reserves, Morgan Stanley reported a year-on-year (YoY) deterioration that left Property and Casualty (P&C) industry reserves $4.3 billion deficient in 2017.
This figure marks a further decline from the $2.5 billion deficiency that Morgan Stanley estimated in 2016, representing an overall deterioration of $1.8 billion YoY, and Morgan Stanley has now reduced its 2018-19 reserve estimates by 3-5% on average.
The report estimated an actuarially reasonable range of reserves between $605.8 billion and $633.7 billion, and found that, at the 34th percentile of this range, industry carried reserves of $615.4 billion were $4.3 billion (or 70bps) below the midpoint.
Deficiencies are now present in five of the top six reserve lines, including Workers’ Compensation, Personal Auto Liability, Other Liability Occurrence, Other Liability Claims-Made, and Commercial Auto Liability, said Morgan Stanley.
The bulk of the decline was concentrated in the other liability lines, which deteriorated $3.7 billion YoY, while Commercial Multi-Peril, Workers’ Compensation, and Personal Auto Liability exhibited modest improvements.
Although 2016 marked the first year in which Morgan Stanley found a deficiency, it was unsurprising given the declining trend of industry excess reserves, which were at $20 billion when Morgan Stanley began the review in 2009, and were at $0.8 billion just four years later.
The review noted that the P&C industry released around $12.3 billion of prior year reserves in 2017, and found that reserve releases contributed $73 billion to industry earnings in 2010-17 and accounted for roughly 20% of industry operating earnings.
Morgan Stanley maintained that it did not consider large industry reserve releases to be sustainable, and forecast slower reserve releases in 2018-19, a headwind to P&C earnings.