In 2016 the U.S. property/casualty industry experienced an overall favourable prior-period loss reserve development for the 11th consecutive calendar year although loss reserve adequacy weakened slightly from 2015, said Fitch Ratings in the segment’s reserve development report.
Core industry reserves from accident years 2007-2016 are expected to be somewhat redundant, but are “slightly deficient to cover potential shortfalls in asbestos and environmental (A&E) losses and when considering adjusting reserves for allowable discounting,” said Fitch.
The asbestos reserve deficiency increased in 2016 with a number of companies feeling a strain from latent A&E claims loss exposures – based on Fitch’s estimates of industry ultimate losses and survival ratios.
Commercial auto and A&E were cited by Jim Auden, Fitch Ratings Managing Director as; “two areas of concern,” however, “the likelihood of large industry reserve deficiencies that would have a meaningful impact on stated capital appears remote.”
Increasing market pressures from a combination of years of sharp underwriting and pricing losses coupled with adverse claims severity have led to commercial auto liability insurance experiencing years of unfavourable reserve development.
Fitch warned commercial auto underwriting losses are still not fully recognized on insurers’ balance sheets – thus remaining an estimated source of deficient reserves.
Medical professional liability insurance (MPLI) still shows strongly redundant reserves – however, Fitch noted that this sector is experiencing challenges from fundamental market changes leading to reduced premium volumes and underwriting losses.
Despite the challenges, clear signs of near-term larger industry reserve deficiencies are not evident, though individual outlier companies may experience reserve increases going forward.
The overall favourable loss reserve development is “a testament to generally conservative reserving practices and indicates balance sheet quality,” said Fitch, “the magnitude of reported development slowed recently, but overall reserve development is projected to remain favourable in 2017.”
However, larger changes in reserve adequacy could be provoked by a substantial change in premium rates market wide, or meaningful changes in policy terms and conditions that are not reflected in incurred loss estimates.
Fitch forecasts more material reserve weakness would most likely come from a sharp change in general inflation or key claims cost drivers such as medical costs or litigation expenses.
