Fitch Ratings has said in a new report that the property and casualty (P&C) industry’s statutory loss reserves remained adequate at YE21, with a 16-year track record of favourable prior-period development supporting balance sheet strength.
The agency said that the positive pricing environment and potential for further redundancies from declining claims frequency in accident year 2020 offset near-term concerns from recent rising inflation. However, it added that prolonged high inflation would materially increase the risks of significant pricing errors and reserve deficiencies.
Fitch wrote in a statement: “P&C insurers experienced sizable reserve deficiencies in the mid-1980s and late 1990s/early 2000s due to high inflation, larger liability losses and extreme depressed market cycles. However, improved operating practices and information systems boost insurers’ capabilities to recognize and react to changes in incurred loss experience.”
It added: “The negative effects of inflation in 2021 were most evident in property and auto lines due to increasing loss ratios from supply-chain shortages and tighter labour markets. Persistently high inflation can create reserve risk in longer-tail casualty and liability lines, making it more difficult to identify changes in loss development trends.”
Meanwhile, Fitch said that the industry continued to report favourable calendar year reserve development in 2021 equal to 1.5% of earned premiums, an improvement from the prior two years. It added that the workers’ compensation line remains the largest source of favourable development.
It went on: “The 2020 accident year experienced favourable development in lines including automobile, other liability, and medical professional liability tied to greater than anticipated benefits from lower claims frequency during the pandemic, which could lead to further reported redundancies going forward.”
