Industry reserves continued to weaken in 2018, according to actuarial analysis by Morgan Stanley, which indicated a $9.8 billion deficiency for the P&C industry, representing a year-on-year deterioration of over $5 billion.
Morgan Stanley estimates an actuarially reasonable range of reserves between $625.2 billion and $657.7 billion.
Industry carried reserves of $631.7 billion are at the 20th percentile of this range (vs the 34th percentile last year), and $9.8 billion below the midpoint.
This represents a deterioration of $5.4 billion from the firm’s review last year, and marks a continued trend of deterioration in industry reserves since its original 2009 reserve study.
Analysts said that industry lines of business most at risk include other liability occurrence, other liability claims-made, and commercial liability, although they noted that the view on workers’ compensation has improved.
Reserve releases have contributed around 20% to industry operating earnings, with the P&C industry releasing approximately $12.1 billion of prior year reserves in 2018.
Morgan Stanley found that reserve releases contributed a total of $93 billion industry earnings in 2010-18 and accounted for around 20% of industry operating earnings per year on average since year-end 2010.
Favorable development from workers’ compensation has increased significantly in recent years (from 4% of total development in 2013 to over 50% in 2018), while short-tailed lines such as homeowners, auto physical damage, and specialty properties, have also accounted for a similar rise over the same period.
Analysts also noted that reserve releases in recent years were concentrated in a few lines where current levels of releases do not appear sustainable.
Industry favourable development climbed to $10.1 billion in 2017 from $3.9 billion in 2016, and rose again in 2018 to $12.1 billion, with workers’ compensation and short-tailed lines not accounting for more than 100% of total favourable development.
Morgan Stanley’s view on workers’ compensation has improved, but it does not believe that the current reserve position in the line supports continued releases at the level reported in recent years.
It has also identified some signs of aggressiveness for the line, with more than $2.0 billion of the $7.1 billion favourable development in 2018 emanating from the two most recent accident years.
Additionally, analysts cautioned that short-tailed lines’ reserve changes can be volatile, and the sustainability of large reserve releases from short-tailed lines and workers’ compensation could be challenged by low pricing and potential uptick in loss cost inflation.
As the support from these two lines fades, Morgan Stanley believes that the weakness from the thinly-cushioned lines will be more pronounced, creating what could be a significant headwind to the historical 20% support to earnings over the next two years.
