Reserve deficiency hits US$67 billion: A.M. Best

Despite moves by several companies to bolster reserves over the past three years, the p&c industry remains under-reserved to the tune of US$67 billion, according to rating agency A.M. Best. In a special report, the rater says reserve adequacy remains a key issue in ratings, with adverse reserve development the number-one cause of insurer insolvency. For casualty-oriented insurers, where carried reserves may be four or five times the size of policyholder surplus, a 25% reserve deficiency will render the company technically insolvent,” the report notes.Of the US$67 billion deficiency, which represents 19% of policyholder surplus, A.M. Best estimates the majority, about US$38.5 billion, comes from asbestos and environmental (A&E) losses. This is despite about US$47 billion in reserve additions by insurers in the last three years.At yearend 2003, loss and loss adjustment expense (LAE) reserves represent about 54% of the p&c industry’s total liabilities. Total loss and LAE reserves were US$445.4 billion, of which just US$30 billion (7%) was set aside for A&E losses. However, this still represents significant growth in reserves while total reserves were up 6.2% in 2002 and 7.8% in 2003, A&E reserves grew 20% in 2002 and 9% in 2003.”As the industry’s reserve deficiency remains quite large, and despite the reserve charges in recent years, A.M. Best expects continued adverse reserve development in the near to mid term, particularly in the commercial lines and reinsurance segments,” the report says. As well, several insurers are in the process of reviewing A&E claims. “While market conditions generally have hardened for most lines of business, future reserve charges may severely impact the balance sheets and operating performance of some carriers. If unexpected, such charges would result in ratings pressure and downgrades.”