P&C Insurers Continue to Face Reserve Deficiency

Fitch Ratings says despite major moves by p&c insurers to shore up reserves over the past few years, the industry remains severely under-reserved for prior-year losses. Fitch estimates US insurers ended 2003 under-reserved by US$43.5-$61.5 billion, or 12-17% of surplus.

And this impact can be felt across company results, the rating agency notes. “Chronic reserve deficiencies lead to questions regarding the quality of past earnings and concerns of whether reported capital is overstated,” a Fitch report notes. “Also, as underwriting and pricing decisions are based heavily on past experience, inadequately setting reserves on past business may promote future pricing errors.”

Using companies’ “schedule P” reserve disclosures, Fitch estimates reserve deficiencies for the loss period 1994-2003 to be US$23-$26 billion, with the bulk of this related to the 1997-2001 loss years, and mainly on long-tail casualty lines such as general liability, workers’ compensation, commercial multi-peril and medical malpractice. Added to this is US$15.5-$25.5 billion in reserve deficiency related to asbestos risks from the years prior to the early 1970s. And the rater also comments on US$5-$10 billion in reserve deficiency stemming from “other latent exposures that may or may not have been identified yet.” This could include silica and other environmental exposures, but might include issues the industry has yet to see surface. “The property/casualty insurance industry is exposed to any mass tort litigation brought by the trial lawyer industry. To the extent that no meaningful tort reform legislation is enacted in the near term, potential unidentified exposures that may create future large insured losses are vast.”