Loss reserve position of U.S. P&C insurers has improved

The U.S. property and casualty industry’s loss reserve position has improved considerably in the last four years, according to Fitch Ratings.
“Reserves for recent hard market accident years were set at more prudent levels, while reserves established during the last soft market that developed deficiently are largely paid and represent an ever smaller percentage of total reserves,” Fitch noted in a report posted on its Web site.
Fitch said it also believes that reporting requirements and management’s obligations under the Sarbanes-Oxley legislation passed in 2002 “are having a positive effect on the industry’s reserving practices, but that there are unexpected consequences related to the legislation as well.”
The U.S. domestic property and casualty insurance industry had a reserve deficiency of between US$11.7 billion and US$26.2 billion at year-end 2005, Fitch noted.
Nonetheless, the ratings agency says, “the industry’s reserve position has vastly improved in recent years.”
For example, at year-end 2002, Fitch projected an industry reserve deficiency of between US$46 billion and US$77 billion, which represented 1626% of reported surplus.
According to Fitch, the industry’s estimated reserve deficiency “now is primarily related to latent exposures, including asbestos-related claims from business written prior to the early 1970s, as well as environmental and other latent exposures.”