At year-end 2011, U.S. insurers' reserves were redundant by $11.7 billion – or 2 percent of total booked reserves – compared with $22 billion at year-end 2010 after the industry released $12.7 billion of reserves during 2011, according to an Aon Benfield study. The favorable emergence of reserves was at the 29th percentile of the estimated range of outcomes.
The year-end figure is comprised of redundancies in personal lines of $7.6 billion ($6.5 billion for 2010), commercial property of $1 billion ($1.5 billion for 2010), and commercial liability of $6.7 billion ($9.9 billion for 2010), offset by deficiencies in workers' compensation of $1.7 billion ($6.5 billion redundant), and financial guaranty of $1.8 billion ($2.4 billion). The effects of the U.S. economic downturn and less favorable trends in loss frequency and severity have resulted in a significant shift in the level of reserve adequacy for workers' compensation compared to the year-end 2010 study.
Workers' compensation has developed adversely by $2.1 billion since 2009. The study, which uses actuarial reserving procedures including the chain ladder method applied to paid and case incurred loss development triangles, estimates that $7billion to $10 billion of favorable reserve development will occur in 2012, and that the reserve redundancy will be eliminated in 1.1 years at the current run-rate.
"The headwind against a broad market hardening from reserve releases continued in Q1 2012, as public companies released an additional $4.2 billion of reserves, compared to $4.6 billion in 2011,” said Stephen Mildenhall, CEO of Aon Benfield Analytics. “However, the forecast is for the winds to abate over the next four to six quarters, with the hard market years slowing and the more recent accident years booked less conservatively."
The reserve redundancy in the two most recent accident years has decreased from $11 billion to $3 billion, reflecting continued market pricing pressures. At year-end 2011, accident years 2010 and 2011 accounted for 45 percent of the total industry booked reserves.
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