U.S. property/casualty insurers’ overall carried reserves were deficient by $34.3 billion, or 6.5% of reported surplus, at year-end 2009, based on statutory data reviewed and reported by A.M. Best Co.

The figures exclude the mortgage guaranty and financial guaranty composites but they include $13.7 billion of asbestos and environmental (A&E) deficiency and $22.5 billion of statutory discount. After removing the effects of A&E and discounting, the industry’s core undiscounted reserves are believed to be slightly redundant by $1.9 billion at year-end 2009, notes the ratings firm. A.M. Best released the following information as part of its report:

—The U.S. property/casualty industry posted its fourth consecutive year of favorable reserve development in 2009, despite the danger of softening rate adequacy in many lines of business.

—A.M. Best says it expects the total industry to continue to report reserve releases for the 2010 and 2011 calendar years, although at a declining rate.

—Ongoing reserve releases will continue to benefit calendar year operating results but will threaten the adequacy of the underlying loss and loss-adjustment expense (LAE) reserves.

—Reserve positions vary dramatically by line of business, reflecting the differing impacts of tort reform, medical inflation, the economy, claim frequency, risk management and price competition.

—The bulk of the industry’s total all lines non-A&E reserve deficiency is derived from accident years 2003 and prior; the total deficiency associated with these accident years is $26.8 billion.

—The deficiency estimates provided are based on the assumption that future levels of inflation will be commensurate with recent historical levels; any sudden increase in inflation could result in much higher deficiencies.

With all of the developments in reserving methods, software and modeling that have occurred recently, along with the emphasis placed on enterprise risk management and profitability, and the decline in unfunded A&E liabilities, A.M. Best does not expect the total property/casualty industry’s deficiency to reach the levels observed during the low point of the last underwriting cycle. However, that does not mean that individual lines of business or individual companies will not be affected adversely to the extent that they were in the past.

A.M. Best says it will be proactive in reviewing companies for signs of deteriorating reserve positions and will reflect those concerns in the rating process. Companies are expected to review their loss and LAE reserve positions on a regular basis, react  appropriately to those analyses and communicate those findings to their A.M. Best analysts. Any unexpected charges from adverse development may result in downward pressure on the company’s rating.

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