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Reserve risk heightened by deteriorating workers’ comp tailwind, say analysts

4th March 2020 - Author: Luke Gallin

Analysts at Morgan Stanley have warned that despite workers’ compensation (W/C) business currently accounting for around 60% of total favourable reserve development, this tailwind won’t last long and adds to reserve risk over the coming months.

reservesIn 2018, W/C favourable reserve development accounted for 60% of total industry development, which, while positive, has served to mask reserving issues that had already started to materialise in other lines of business, notes Morgan Stanley.

Analysts at Morgan Stanley have warned for some time that industry reserves appear inadequate and continue to decline in the level of favourable development that has boosted earnings for the best part of ten years.

Fourth-quarter and full-year 2019 results season has just started, but already, large primary insurer Travelers has reported lower net favourable prior year reserve development, suggesting that other companies might well report a similar experience in the period.

Analysts at Morgan Stanley highlight Travelers and add that combined with the impacts of social inflation, investors now have reserve risk more on the forefront of their minds.

RMS

Reserve deterioration in the industry was highlighted by Morgan Stanley last year and more recently, by Charles Whitmore, managing director at reinsurance broker Guy Carpenter, who warned that reserve deterioration in the re/insurance industry represents a potential inflection point that demands close attention in 2020.

In recent times, argue Morgan Stanley analysts, W/C has had significant leverage on overall reserve development in the industry. Over the last nine years, analysts state that the level of overall favourable reserve development has been relatively steady at around USD 10 billion annually, however, the business mix has altered considerably.

In fact, the change has been so dramatic that W/C now accounts for roughly 60% of total favourable reserve development, which, analysts say underscores the risk going forward as the W/C tailwind “won’t last long, and the lines we see at risk (Other Liability) have already begun to take charges.”

Ultimately, Morgan Stanley feels that the market is getting close to a point where favourable development from W/C has “peaked”.

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