According to estimates from KBW, the domestic P&C insurance industry’s year-end 2021 statutory loss reserve redundancy is at approximately $47.8 billion, reflecting increasingly conservative initial accident-year (AY) reserving and some still-unrecognised AY20 COVID-related frequency benefits.
KBW noted that recent accident-years’ conservative loss picks should allow improving core commercial loss ratios y/y in 2022, 2023, and likely beyond, while commercial insurance rate increases, which typically focus on expected normalised returns still subject to elevated loss trends and still-low interest rates, should persist.
KBW estimates that the U.S. P&C insurance industry’s overall YE21 statutory loss and defence and cost containment reserves were overstated by about $47.8 billion, above YE20’s estimated $30.0 billion redundancy, reflecting increasingly conservative initial accident-year reserving and some still-unrecognised AY20 COVID-related frequency benefits. Virtually all major lines’ YE21 statutory reserves appear overstated.
YE21 ratios of incurred but not reported (IBNR) (evaluated at 12, 24, and—to a lesser extent—36 months) to net earned premiums (NEP) were higher than preceding years’ ratios for all lines combined, and for most individual lines.
As proved true over the course of 2021, this redundancy shouldn’t meaningfully disrupt commercial insurance rate increases, which typically focus (appropriately) on expected future normalised returns still subject to elevated loss trends and still-low interest rates.
The KBW report noted that unlike past cycles, when redundant reserves signalled near-term pricing declines (overstated losses imply that the rates based on those losses are similarly overstated), it expects current commercial rate increases to decelerate only slowly, since most re/insurers remain nervous about elevated loss trends, persistent ‘unusual’ losses (ranging from under-modelled weather-related losses formerly seen as secondary perils to COVID-19, to cyber risk, to the Russia/Ukraine conflict) and still-low (from a historical perspective) interest rates.
KWB favour specialty commercial re/insurers, as earned rate increases above loss trends—and eventually, less conservative reserving—should drive core combined ratio improvement in and beyond 2022.
