P&C reserve redundancies likely to weaken, but remain adequate: Fitch

Fitch estimates that U.S. property and casualty industry reserves at year-end 2009 are between 1% deficient and 2% redundant.
In its report, Are Redundancies Exhausted?, Fitch noted that the hard market years of the mid-2000s continued to prove more profitable than anticipated, but that future redundancies for these more mature accident years will likely continue at an increasingly limited magnitude.
Currently insurers are reporting significantly higher accident year loss ratios relative to the previous hard market period, reflecting the deterioration in market conditions over the last several years, the report says.
“Although the 2007 and 2008 years have developed favourably to date, raising questions on whether insurers are prematurely reducing reserves in the midst of weaker earnings fundamentals, Fitch believes that these accident years along with 2009 are not likely to show strong redundancies going forward, but are established at adequate levels,” the report says.
“Future erosion in reserve adequacy will likely be tied to an unexpected rise in prior year incurred losses due to a return on higher loss cost trends, tied to general inflation or factors in which insurers have a higher sensitivity, such as medical costs or tort and litigation expenses.”