Improved P&C reserves might not last

Recent improvements in the U.S. property and casualty insurance industry’s overall reserve levels might not last moving into 2007, according to an article recently published by Standard & Poor’s Ratings Services.
The article “Reserving Discipline For U.S. Property/Casualty Insurers Is Here, But Is It Sustainable?” indicates that the industry has experienced closer to adequate reserve levels than in the recent past.
According to the report, the improvement does not include asbestos and environmental exposures, which are still developing unfavorably. However, S&P’s says this better industry reserve adequacy may not be sustainable, especially considering the trend towards a moderately softening pricing environment.
“Underwriting discipline has improved since the late 1990s, when insurers grossly underpriced to gain market share and relied on investment income to sustain financial strength,” S&P’s credit analyst Siddhartha Ghosh says. “That, coupled with a harder market, has yielded high profitability and lower-than-expected loss levels.”
The industry’s overall reserve position improved substantially in 2005, compared with its the preceding three years (2002-2004), according to the article. However, S&P’s says “the unusually long need for reserve additions for accident years 1997-2001 are flying in the face of conventional wisdom (loss experience for older business is supposed to clarify as it seasons, with reserve addition needs therefore reducing), and emphasizes the challenges of reserving in those lines are casting doubts on the insurance industry’s ability to reserve correctly, especially in a highly price-competitive environment as that experienced in late 1990s.”