U.S. Insurers’ Reserves Redundant by $11.7B: Aon Benfield Study

Insurers’ reserves were redundant at year-end 2011 by $11.7 billion — or 2 percent of total booked reserves – compared with $22.0 billion at the year-end of 2010, after the industry released $12.7 billion of reserves during 2011, according to a recent study.

The study, compiled by Aon Benfield, reveals U.S. insurance industry reserve adequacy year-end 2011 data.

The year-end 2011 figure is comprised of redundancies in personal lines of $7.6 billion (year-end 2010: $6.5 billion); commercial property of $1.0 billion (year-end 2010: $1.5 billion); and commercial liability of $6.7 billion (year-end 2010: $9.9 billion), offset by deficiencies in workers’ compensation of $1.7 billion (year-end 2010: $6.5 billion redundant), and financial guaranty of $1.8 billion (year-end 2010: $2.4 billion).

The effects of the U.S. economic downturn and less favorable trends in loss frequency and severity resulted in a significant shift in the level of reserve adequacy for workers’ compensation compared with the year-end 2010 study. Workers’ compensation has developed adversely by $2.1 billion since 2009.

Aon Benfield Analytics estimates that $7 billion 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 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.

“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 adequacy study is based on early aggregations of insurers’ statutory reports, and is subject to change as more combined reports are filed with the data aggregating service, SNL. The estimates are subject to considerable uncertainty and actual reserve emergence could vary materially from the amounts detailed. It is not an actuarial reserve opinion.

A full version of the study is available online.