Fitch Ratings believes that life insurers in the U.S are likely to experience material reserve charges related to long-term care (LTC) products through 2019 due to overly aggressive assumptions for statutory reserving.
A report by the rating agency noted that statutory reserving across the industry continues to be based on overly aggressive assumptions despite management actions to strengthen reserves, implement premium price increases, and reduce benefit options on legacy in-force business.
Although it remains difficult to predict the timing of the reserve charges, Fitch expects emerging experience to pressure insurers to continue to update reserving assumptions, which will lead to additional material reserve charges through 2018 and well into 2019.
The report found that the experience data used to validate reserve assumptions is still not credible at advanced attained ages and later policy durations, which calls into question the validity of morbidity assumptions.
Fitch suggested that, while it remains important to consider the baseline level of morbidity assumed in reserves, future morbidity improvement currently represents an aggressive assumption inconsistent with statutory reserve standards.
“As performance deteriorates among these legacy blocks of business, many life insurers will need to strengthen reserves by at least 10% through 2019,” said Anthony Beato, a Director at Fitch.
Going forward, reserve strengthening is likely to be widespread across the U.S life industry, while reinsurance activity is also likely to increase as insurers look to reduce LTC exposures.