Study Finds Insurers’ Reserves Declining

Research and investment firm Keefe, Bruyette and Woods reported on June 21 its annual P/C industry reserve review.

The report found that the insurers’ reserves continue to decline. And it warned that the positive reserve development that we’ve been seeing in this sector is likely to slow down soon.

Specifically, the repot estimated that the P/C industry’s loss reserves for accident years 2002 to 2011 are deficient by $3.0 billion — or 0.5 percent — as of year-end 2011.

“We continue to believe most P/C insurers will see a drop-off in the earnings benefit they receive from favorable development,” the report predicted. “We believe accident years 2008 to 2011 are under-reserved, and we expect to see adverse development related to those accident years in the future.”

On the other hand, though, it found that in contrast to accident years 2008 to 2011, periods between 2002 and 2007 remain redundant.

Keefe, Bruyette and Woods also noted that reserve adequacy varies by line — and some lines are in much better shape than others.

The study found that the industry’s reserves are redundant in private passenger auto liability, medical malpractice, and other liability lines. But it said reserves are deficient in the workers’ compensation, commercial multiple peril, products liability, and liability reinsurance lines.

Keefe, Bruyette and Woods forecasts that many companies will take reserve charges in the next couple of years. Recently, major companies with the most favorable development included State Farm and Berkshire Hathaway’s insurance operations, while The Hartford, Liberty Mutual and AIG recorded modest adverse development.

“We believe there will be winners and losers in this underwriting environment,” according to the report.

To determine which companies might fare better than others, the report recommended that one should carefully consider a company’s balance sheet strength (both on the asset side and the liability side) and the track record of its management team, in addition to reviewing a company’s operating performance.

We will find out more about the insurers’ reserve situation when carriers begin reporting their 2012 second-quarter results later this month.