U.S. Insurers’ Reserve Deficiency Hits US$67 Billion

Despite moves by several companies to bolster reserves over the past three years, the property and casualty insurance industry remains under-reserved to the tune of US$67 billion, according to rating agency A.M. Best. In a special report, the rater says reserve adequacy remains a key issue in ratings, with adverse reserve development the number-one cause of insurer insolvency.

For casualty-oriented insurers, where carried reserves may be four or five times the size of policyholder surplus, a 25% reserve deficiency will render the company technically insolvent,” the report notes. Of the total reserve deficiency, which represents 19% of the industry’s policyholder surplus, A.M. Best estimates that the bulk of this (about US$38.5 billion) relates to asbestos and environmental (A&E) losses. This reserve inadequacy exists despite insurers having topped up A&E reserves by about US$47 billion over the past three years.

By the 2003 yearend, loss and loss adjustment expense (LAE) reserves represent about 54% of the industry’s total liabilities, the rating agency notes. Total loss and LAE reserves were US$445.4 billion at this point, of which just US$30 billion (or 7%) had been set aside for A&E losses. However, this still represents significant growth in reserves – while total reserves were up 6.2% in 2002 and 7.8% in 2003, A&E reserves grew 20% in 2002 and 9% in 2003. “As the industry’s reserve deficiency remains quite large, and despite the reserve charges in recent years, A.M. Best expects continued adverse reserve development in the near to mid-term, particularly in the commercial lines and reinsurance segments,” the report says. As well, several insurers are in the process of reviewing A&E claims. “While market conditions generally have hardened for most lines of business, future reserve charges may severely impact the balance-sheets and operating performance of some carriers. If unexpected, such charges would result in ratings pressure and downgrades.”