Reserve uncertainty could sustain hard market: Swiss Re

Ongoing reserve uncertainty may reduce insurers’ risk appetite, thereby sustaining hard market conditions, according to a new report by Swiss Re.

“Direct non-life insurers in advanced markets have on average released prior-year loss reserves, although the pace has been slowing recently,” according to Economic Insights, a Swiss Re publication released Jun. 22. “Larger reserves for the most recent years and a cushion for as-yet unreported claims suggest a solid buffer is in place, but recent shocks are pushing up claims, raising questions about adequacy.

“With uncertainty high, insurers may reduce risk appetite and new business capacity, which may in turn sustain the hard market conditions.”

In Canada, reserve releases were quite modest in 2018, leading up to the pandemic, as noted by MSA Research president and CEO Joel Baker. The Canadian property and casualty industry saw its reserve releases contract in 2018 to their lowest level in seven years, Baker noted in MSA’s Q4 2018 Quarterly Outlook. There appeared to be “less gas in the reserve tank,” as Baker said at the time.

Fast forward to 2022, and the Canadian P&C industry released an “historically large reserve release of over $7 billion,” Baker wrote in the MSA Q4 2022 Quarterly Outlook. That turned what could have been a run rate industry combined ratio of 96% into a more palatable 85.4% in 2022.

With this release of reserve funds booked in anticipation of large events, a question arises about whether adequate reserves are left for anticipated future shocks, as Swiss Re noted. If more reserve ‘gas’ is required in the tank, that could extend or prolong hard market conditions.

“Releases in large advanced markets eased slightly from 2020 through 2022, driven by [auto] and general liability in the U.S. and U.K.,” Swiss Re wrote. “Despite current high reserve buffers, the pressures from recent systemic shocks and elevated inflation create more uncertainty, and we believe there is a higher probability that adequacy may weaken.

“This risk, and uncertainty over legacy business, could limit insurers’ capacity available for new business and require more premium to cover. This could extend or exacerbate the current hard market conditions in non-life insurance.”

Related: Will Canada’s 2023 underwriting results track U.S. improvements?

Specifically, Swiss Re’s report noted inflation continues to wreak havoc in reserve estimates for anticipated claims. And there are a host of other factors creating uncertainty in the P&C market right now.

“Insurers’ cautious initial loss estimates for the events of 2020-21 have contributed to the pattern of reserve releases,” said the report, which was focused on the U.S. and U.K. P&C insurance markets.

“COVID-19 claims estimates have come down from initial calls of up to US$100 billion to re/insured life and non-life losses of about US$45 billion to US$50 billion,” the report noted. “Lower [auto] claims frequencies during COVID-lockdowns also contributed to the build-up of excess reserves even after releases for the 2020 and 2021 accident years.

“However, caution is still warranted as the ultimate result of many COVID-19 court cases remains unknown, and third-party investors are purchasing stakes in the litigation, which could contribute to social inflation.”

Moreover, the war in Ukraine has added to reserve risk, as losses remain uncertain in lines that include aviation, political risk, cyber, and D&O, Swiss Re commented. It added that tentative tallies for Ukraine war-related insurance claims varied between US$10 billion to US$20 billion.

“High natural catastrophe losses are a further factor creating uncertainty,” the report said. “The potential for more supply chain issues and shortages has made it harder to predict claims cost increases from a demand surge after a large natural disaster. Among recent events, high initial estimates of Hurricane Ian’s losses may help ensure sufficient reserves have been booked.”

Feature image courtesy of iStock.com/Guillem de Balanzo