Canadian Underwriter

U.S commercial reserves deficient by US$20 billion

June 16, 2003   by Canadian Underwriter

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A new study suggests reserves in U.S. commercial lines could be deficient by as much as US$20 billion. The report, by investment bank Cochran, Caronia Securities LLC, says reserves for 1997 to 2001 could be deficient by US$13-$20 billion. This is equivalent to 10-15% of total commercial lines surplus, and also about the same as all of 2002 commercial lines earnings in the U.S.
The figures, however, do not include asbestos and environmental claims, as well as most directors’ and officers’ claims, which could add US$35 billion or more.
“IBNR (incurred but not reported loss) has sunk to startling low levels – approximately 60% of the historical norm. The industry is depleting its cushion against losses from prior years and may have to fund prior period claims with future earnings,” the report’s author, Adam Klauber, notes. “Recognition of deficiencies in 1997-2001 reserves should reduce commercial lines profitability by 5% to 10% annually for the next five years.”
Among the factors contributing to growing loss ratios and rising adverse development are premium decreases during the soft market depleting capital, slow reserving action against rising losses and the rise of class actions.

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