Reserve releases masking poor results, creating an unsustainable trend

The property and casualty industry cannot mask its poor results much longer with reserve releases, warned Christian Mumenthaler, Swiss Re’s chief marketing officer, reinsurance.
Mumenthaler made his observation during his presentation, Global Re/Insurance Market Outlook: Balancing Risks and Opportunities of the Recovery, at the Swiss Re 2011 Canadian Insurance Market Outlook in Toronto on March 31.
He noted the global property and casualty market’s combined ratio increased in 2010, despite reserve releases. Since 2008, the industry has not reported an underwriting profit.
There were a few years, in the early 2000s, when the industry over-reserved. But those days appear to be done, he said.
“While the industry reported an underwriting loss of $50 million in 2010, if you take out the reserve release, the industry experienced approximately a $1-billion underwriting loss. It was only helped through reserve releases,” he said during an interview after the presentation.
“The problem is, what is underwritten now will probably [produce an underwriting loss] in two or three years, but the industry releases reserves instead of putting [the reserves] into the current business, and in the next hard cycle you’re going to have the same issues that you had in the last one.”
The tendency of insurers to mask poor results with reserve releases is a product of crowd behaviour, he suggested.
“When the whole market is going in this one direction, I think it’s very hard to be different. But it’s very important to recognize it and that the shareholder recognizes it so that they can put sufficient pressure on the insurance industry to do the right thing, which is to raise rates.”