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Reserve releases down in Q2, with headwinds to intensify: Morgan Stanley

20th August 2019 - Author: Matt Sheehan

Reserve releases continued to decline during the second quarter of 2019, according to analysts at Morgan Stanley, with total favourable development down at $741 million for the 32 companies tracked by the firm.

This was $616 million lower than in the second quarter of 2018, when the companies recorded favourable development of $1.36 billion.

More than two thirds of the group saw a lower level of reserve releases year-on-year, and Morgan Stanley expects this trend to continue, especially for companies exposed to long-tailed liability lines.

Analysts believe the risk of adverse development will continue to rise over the next 12-24 months, creating a headwind to industry earnings over this period.

They also suggest the industry’s overall reserve position was deficient by about $9.8 billion at year-end 2018, with the bulk of the deficiency in long-tailed liability lines such as Other Liability Occurrence and Claims-Made, and Commercial Auto Liability.

The comments follow a report by Moody’s earlier in August 2019, which warned that reserve releases were unsustainable for European property and casualty (P&C) insurers, and would contribute less to their earnings over time.

The study found that reserve releases equated to 2% of total net earned premiums in 2018 and accounted for 23% of combined profit before tax, compared with a five year average of 16%.

However, releases at this level are unlikely to be viable in the long-term, Moody’s cautioned, due to factors such as a hike in claims costs, large industry losses from adverse weather events, and challenging pricing conditions.

Morgan Stanley has also previously reported on what it sees as “unsustainable” reserving practices in the reinsurance space, which could jeopardise balance sheet stability in the near-to-long-term future.

Although major global reinsurers continue to have stable reserve bases, this untenable reliance on reserve releases could intensify as the benign loss experience continues and rates consistently decline in the market, the firm warned at the time.

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