Direct non-life insurers in advanced markets have experienced a deceleration in the release of prior-year loss reserves, prompting concerns about adequacy due to recent shocks, leading to an uptick in the share of incurred-but-not-reported (IBNR) claims, according to a Swiss Re Institute report.
The global insurance industry had made favourable progress over the past decade, but reserve releases have been tapering off. The COVID-19 pandemic, the war in Ukraine, elevated inflation, and natural catastrophe losses have pushed up claims, straining the existing reserves.
Although insurers released some reserves in anticipation of pandemic-related claims, the surge in inflation and other pandemic-related impacts, including court backlogs, have added significant uncertainty to reserve analysis.
Consequently, there are concerns that reserves may prove insufficient despite the current substantial buffer.
Analysis of reserve developments in key markets reveals mixed trends. US insurers have consistently released reserves since 2006, with an average annual release of 1% over the past 25 years. In the UK, reserve development has remained relatively balanced over the long run, without substantial releases.
In continental Europe, conservative loss estimates have historically led to larger reserve releases, and this trend continued in the years preceding 2021.
Cautious initial loss estimates for the events of 2020-2021 contributed to reserve releases, but uncertainties surrounding COVID-19 court cases and third-party investors’ involvement in litigation pose ongoing risks.
Additionally, the war in Ukraine has added further reserve risk, especially in lines such as aviation, political risk, cyber, and D&O.
The recent inflation shock, coupled with other systemic shocks, has magnified the magnitude and variability of loss reserves. Inflation affects claims through various channels, particularly in long-tail lines such as liability insurance.
These lines, which account for a significant portion of reserves, are susceptible to medical, wage, and social inflation. Furthermore, inflationary episodes can lead to delayed settlements, contributing to higher jury verdicts and claim settlements.
Despite the presence of high reserve buffers, the combined pressures from recent systemic shocks and elevated inflation have heightened uncertainty.
There is an increased probability that reserve adequacy may weaken, potentially limiting insurers’ capacity for new business and necessitating higher premiums. This scenario could further sustain the existing hard market conditions in the non-life insurance sector.
Insurers and industry stakeholders are urged to focus on reserve adequacy and carefully monitor the evolving situation.
The ongoing uncertainties surrounding legacy business and the need for additional premiums to cover potential inadequacies pose challenges for insurers.
A proactive approach in assessing and addressing reserve needs will be crucial to maintain stability in the non-life insurance market, the report noted.
