U.S. p&c industry’s reserve adequacy relatively stable in 2016, auto takes hit: Conning

The reserve adequacy of the property and casualty industry south of the border was relatively stable last year, with 2016 marking the 11^th consecutive year of favourable development from prior-accident years, Conning notes in a study issued this week.

“The property-casualty industry’s overall loss position as of year-end 2016 appears stable, with significant differences by line of business,” states 2016 Property-Casualty Loss Reserves: Reserve Redundancies – What Goes Up Must Come Down.

The report reviews loss reserve position at the end of 2016, by line of business and in total. The lines reviewed represent about 83% of the total reserves for the U.S. p&c industry; lines not reviewed include accident and health, miscellaneous casualty lines, surety and financial and mortgage guaranty lines.

The review “suggests that reserves remain modestly redundant,” says Bill Burns, a vice president of insurance research for the global investment management firm.

“For the total industry, we estimate carried reserves at year-end 2016 to be redundant by 1.2%, which is slightly less than our estimated redundancy of 1.7% at year-end 2015,” Burns continues in a company statement.

Putting a number to findings, Conning head of research Steve Webersen reports that the industry experienced favourable loss development of US$4.7 billion in 2016.

Despite more than a decade of favourable development from prior-accident years, Webersen points out that both the amount of favourable development and the estimated redundancy “has been steadily dwindling over the past few years.”

Add to that continuing situation the variability that there is among the lines of business, Conning reports.

“In private passenger auto, for instance, our analysis suggests that the line is deficient for the first time since 2001, while the reserve deficiency for commercial automobile has worsened considerably since the prior year,” Webersen notes.

With regard to premiums, net premiums earned increased by 1.9% last year, the report notes, representing the smallest increase since 2010.

Related: U.S. P&C loss reserves weaken, but some redundancy remains: Conning

“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,” it notes.

“While the non-reviewed lines represent only about 17% of the industry’s reserves, they have contributed significantly to the industry’s profitability over the past several years,” the report adds.

“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,” it concludes.

“This is an important assumption that continues to be of concern in this period of low inflation and sluggish economic growth,” the report suggests. “With a more robust recovery and/or inflation, these patterns are likely to change, thus adversely affecting loss reserve adequacy.”

Related: US$33 billion in 2016 global insurance M&A marks retreat from prior-year levels: Conning