Replenishing reserves still a question mark

Even though underwriting results for property and casualty companies globally have improved markedly over the past few years, the ongoing challenge of attaining ultimately adequate reserves remains, according to a recent report by Standard & Poor’s.
“Insurers and reinsurers appear no closer now than they were a year ago to achieving full reserve adequacy for 1997-2001 business,” S&P’s report says. “Indeed, ground has been lost.”
According to S&P, “claims from accident years 1997-2001, during which the soft market’s competitive pressures led to increasingly severe underpricing and lax underwriting, are seasoning in a lurching rather than a gradual fashion.
“The ongoing legacy issues from those years, which include the industry’s overstatement of capital by an average of 16% after the World Trade Center disaster, mean that reserves might still undergo more adverse development.
“Already this year, on Feb. 9, 2006, American International Group Inc. (AIG) announced an additional US$1.69 billion in adverse reserve development for claims from prior accident years.”
Over the first nine months of 2005, reserves for accident years 2002 and prior experienced US$16 billion of adverse development. This more than offset the positive development during those quarters for accident years 2003 and 2004, S&P’s says.
“Strong pricing and low losses for those years enabled US$10 billion of reserves to be released for accident year 2004, and US$3 billion for accident year 2003,” S&P’s notes. “The US$16 billion of adverse development during the first three quarters of 2005 for accident years 2001 and prior brings the cumulative adverse development of reserves for those accident years to about US$60 billion. That total includes US$10 billion of adverse development recorded in 2004, US$14 billion in 2003, and US$22 billion in 2002. It is 21% of the entire P/C industry’s year-end 2001 statutory surplus of US$290 billion and 16% of its total year-end 2001 reserves of US$373 billion.”
S&P says “it would be premature for us to predict how much of the US$16 billion of adverse development will ultimately be attributed to the lax underwriting and under-reserving of accident years 1997-2001. We do anticipate, however, that once full year 2005 results are released, that block of years will make up a significant portion of it.”