Keefe, Bruyette & Woods (KBW) has reported that reserve releases in 2017 were much higher than expected, particularly in property & casualty (P&C) and workers compensation lines, calling into question the current reserve adequacy of many business lines and compromising underwriting results.
KBW observed that at year-end 2017, the P&C industry’s statutory loss and defence and cost containment reserves were overstated by about $6.7 billion, compared with an estimated $14.9 billion at year-end 2016.
Workers compensation reserve releases were also unprecedentedly high, with releases over 2017 being roughly equal to the total cumulative releases from the previous four years.
Additionally, redundancies in most lines were partly offset by inadequacies in Commercial Auto Liability, Product Liability, and Other Liability.
KBW attributed the industry’s declining redundancies to overall rate decreases in recent years and the absence of inflationary shocks, although it also noted that reserve inadequacies varied significantly across lines, reflecting different underwriting practices and pricing trends.
Lower redundancies mean reserve releases will augment 2018/2019 underwriting results less than in recent years, although KBW expects the cyclical trend of release declines to reassert itself again over the next two years.
Although most lines recorded net releases over 2017, some saw less adverse reserve development than in 2016, including Private Passenger Automobile Liability, Commercial Auto Liability, Commercial Multi-Peril, Other Liability, and Product Liability.
