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JLT Re warns of inflection point as re/insurers accelerate reserve releases

3rd September 2018 - Author: Luke Gallin

JLT Re, the reinsurance broking arm of global brokerage JLT Group, has described the recent reserving practices of some insurers and reinsurers as somewhat aggressive, noting that some companies are accelerating their releases in certain business lines.

reservesWhile much of the marketplace focuses on the property catastrophe losses of 2017 as a driver of market change, albeit it both muted and disappointing change (in terms of rate movements) for most, JLT Re has reported that some industry observers are keeping a close eye on the casualty market, most notably long-tail business.

According to an article within its summer 2018 Risk Perspective publication, some industry observers are paying attention to the fact that while re/insurers are continuing to mask poor underwriting results with reserve release, some are also accelerating their releases in certain lines of business.

George Harris Hughes, Partner at JLT Re, commented: “Broadly speaking, we are one of those observers saying that reserve releases are not sustainable and that reserves are being released faster than more recent accident year experience would dictate.

“There is also evidence to suggest that some of these reserve releases are coming from the most recent accident year [2017] – which seems to be somewhat aggressive.”

The loss development from 2017 catastrophes – widely expected to become the costliest loss year on record for global insurers and reinsurers – remains ongoing for some events, highlighted by the loss creep reported by numerous companies from hurricane Irma.

Releasing reserves from the 2017 calendar year might be a risky approach, as it remains unclear exactly what the final loss bill from some of the events might be, suggesting companies’ loss experience could increase further still.

Prior to the catastrophe events of 2017, the reinsurance market had been in a prolonged softened state, underlined by intense competition from both traditional and alternative providers of capital, and benign loss activity, which, combined to drive down rates and ultimately squeeze margins.

In response, re/insurers started releasing reserves more aggressively in order to offset poor underwriting returns driven by challenging market conditions, ultimately boosting their balance sheets and essentially masking true profitability.

For quite some time now, insurance and reinsurance industry participants, experts, analysts, and observers have warned of an inflection point approaching for the challenging property and casualty (P&C) arena, underlined by increased claims experience alongside diminishing reserves and pricing.

“Reserve releases have allowed (re)insurers to mask the true performance of their book and have allowed (re)insurers to overstate positive rate change to keep loss ratios within target. As reserves deplete, this is beginning to take its toll. At the moment, the impact isn’t sufficient but, assuming that this is a trend, then [casualty] rates will invariably start to creep up,” added Harris Hughes.

P&C industry reserve releases remained plentiful through 2017, particularly in the workers’ compensation lines. This trend was highlighted by industry analysts recently, who noted a $4.3 billion deficiency in P&C industry reserves in 2017.

According to analysts, deficiencies are now present in five of the top six reserve lines, and calendar year 2017 releases equalled total cumulative releases of the previous four years.

Chief Executive Officer (CEO) of JLT Re, North America, Ed Hochberg, said: “I’ve been predicting that reserves will start to go upside down for the past five years and I’ve been wrong! But I do believe that it will happen, even though calling actuarial trends is difficult. We are seeing the early signals of that weakening, for example, in commercial auto and financial lines.”

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