2017: 2016 Property-Casualty Loss Reserves - Reserve Redundancies-What Goes Up Must Come Down



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In this study, Conning analyzes Schedule P statutory data and presents its loss reserve findings for individual lines of business and aggregated for the industry.  This marks the eleventh consecutive year that the industry has had favorable development from prior accident years. However, while we estimate carried reserves at year-end 2016 to be redundant, that redundancy is slightly less than our estimated redundancy of 1.7% at year-end 2015.  This is the first study in which we have estimated a range of reserves for each core line of business and accident year.

1. Introduction 

2. Executive Summary 

  • Impact of AIG on Results
  • Reviewed (Core) Lines of Business
  • Other Lines of Business
  • Asbestos and Environmental
  • Midsized Companies

3. Industry Overview—Common Themes 

  • Favorable Loss Development Continues, but Appears to Be Slowing Down
  • Factors Influencing the 2016 Reserve Picture
  • Summary Evaluation of Reserve Strength
  • Summary

4. Private Passenger Auto Liability/Medical 

  • Reserve Position Deteriorates in 2016
  • Summary

5. Homeowners/Farmowners 

  • Reserve Levels Weaken Slightly in 2016
  • Summary

6. Workers’ Compensation 

  •  Reserves Strengthen Further in 2016
  • Summary

7. Commercial Multiperil 

  • Reserves Remain Redundant Despite Adverse Development
  • Summary

8. Other Liability 

  • Occurrence Reserve Levels Deteriorate; Claims-Made Is Holding On
  • Summary

9. Commercial Auto/Truck Liability/Medical 

  • Reserve Deficiency Increases Due to Adverse Development
  • Summary

10. Medical Professional Liability 

  • Reserve Redundancies Continue but Less Than Prior Years
  • Redundancy in Reserves for All Accident Years
  • 2016 Calendar-Year/Accident-Year Reconciliation
  • Claim Counts and Severity
  • Summary

11. Asbestos and Environmental 

  • Development of the Survival Ratio
  • Summary

12. Industry Comparison with Midsized Insurers 

  • Midsized Insurers Continue Their Strong Performance
  • Redundancies in Most Lines of Business
  • 2016 Calendar-Year/Accident-Year Reconciliation
  • Summary

Appendix 

A. Methodology

B. Glossary

C. Additional Data


Introduction

Our review of the property-casualty insurance industry’s loss reserve position is that it deteriorated slightly in 2016, when compared to our previous annual analyses. Overall, Conning believes the industry continues to carry sufficient reserves (gross of discount), with a modest degree of safety, under assumptions that claim settlement patterns will continue at their current pace. This is an important assumption that continues to be of concern in this period of low inflation and sluggish economic growth. With a more robust recovery and/or inflation, these patterns are likely to change, thus adversely affecting loss reserve adequacy.

In our opinion, the industry’s reserve adequacy remained relatively stable in 2016. Based on the preliminary data used for this analysis, in 2016, the industry experienced favorable loss development of $4.7 billion. This marks the eleventh consecutive year that the industry has had favorable development from prior accident years.

This is the first study in which we have estimated a range of reserve adequacy for each core line of business and accident year. More information on these ranges is provided in subsequent sections in this study.

In 2016, AIG, a leader in the commercial lines market, experienced adverse loss development of $4.4 billion. Therefore, excluding AIG, the industry had favorable loss development of $9.0 billion We cannot know how much this development may be reflective of emerging information in underlying loss trends and/or changes in loss reserving methodology. However, given the magnitude of the impact from AIG, we provide analyses including and excluding AIG data where appropriate.

Net premiums earned within the industry increased by 1.9% in 2016, the smallest increase since 2010. While most lines of business showed growth in 2016, the rate of increase was smaller than it has been for the past several years. Although most of the reviewed lines of business have experienced growth in underlying exposures due to slowly improving economic conditions, competition and below-average catastrophe losses in recent years continue to put downward pressure on rates.

The lines of business that we review represent about 83% of the total reserves for the property-casualty industry. The remaining reserves are for lines of business that we do not review, including A&H, miscellaneous casualty lines, surety, and financial and mortgage guaranty lines. These nonreviewed lines have loss development patterns that are inherently volatile and, as such, do not lend themselves to the type of analysis we perform on the reviewed lines of business. While the nonreviewed lines represent only about 17% of the industry’s reserves, they have contributed significantly to the industry’s profitability over the past several years.