Re/insurers in “the cheating years” of using reserves to boost results: Guy Carpenter

Having just come through a worldwide financial crisis, global reinsurers are once again entering “the cheating years,” describing a cycle in which insurance companies employ reserve funds to bolster their combined ratios, and thus boosting their return on equity (ROE) results.
The “cheating years” is in contrast to a cycle of “restoration years,” during which time reinsurers replenish and hold onto their reserve funds as opposed to releasing them, thereby restoring their balance sheets.
What makes 2009 somewhat unique is that reinsurers are releasing their reserves after the tail end of the global financial markets’ volatility, and during a period of relative profitability and low cat activity, according to Cliff Rich, the head of Guy Carpenter’s market information department.
“We are in the cheating years,” Rich said at a Guy Carpenter ‘Specialty Series’ meeting in Toronto on Feb. 3. ‘We can say, as the reinsurance companies in this industry, we weren’t in a [pronounced] cheating year in 2009, but only because we didn’t have big hurricanes.
“Had we had big hurricanes, companies would look at those years and take down some of its reserves in order to improve their combined ratios, [and so the cheating] might have happened more.”
Rich noted that even though reinsurers had a relatively good year in 2009, when the released reserves were added into the financial results, the industry’s combined ratio still amounted to more than 100% in 2009.
David Flandro, head of Guy Carpenter’s business intelligence unit, observed many reinsurers were reporting reserve releases in 2009 Q4. “This is not a good trend,” he said. “This has been happening consistently since 2007.”
Reinsurers had been replenishing their reserves since the 2005-07 “restoration” years, and were basically over-reserved for the accident years 2003-05, Flandro said.
“That has increased companies’ returns on equity, it’s helped them become more profitable, it’s been a reliable source of earnings for the last three years,” Flandro observed. “We think that’s about to end. We can’t say definitively when it will end, but you can’t release reserves forever.”