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A.M. Best Special Report: U.S. P/C Industry Loss & LAE Reserves Weakening

Source: A.M. Best

Posted on 15 Sep 2010

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U.S. property/casualty insurers' overall carried reserves were deficient by $34.3 billion, or 6.5% of reported surplus, at year-end 2009, based on statutory data reviewed by A.M. Best Co. The figures exclude the mortgage guaranty and financial guaranty composites but they include $13.7 billion of asbestos and environmental (A&E) deficiency and $22.5 billion of statutory discount. After removing the effects of A&E and discounting, the industry's core undiscounted reserves are believed to be slightly redundant by $1.9 billion at year-end 2009.

* The U.S. property/casualty industry posted its fourth consecutive year of favorable reserve development in 2009, despite the danger of softening rate adequacy in many lines of business.

* A.M. Best expects the total industry to continue to report reserve releases for the 2010 and 2011 calendar years, although at a declining rate.

* Ongoing reserve releases will continue to benefit calendar year operating results but will threaten the adequacy of the underlying loss and loss-adjustment expense (LAE) reserves.

* Reserve positions vary dramatically by line of business, reflecting the differing impacts of tort reform, medical inflation, the economy, claim frequency, risk management and price competition.

* The bulk of the industry’s total all lines non-A&E reserve deficiency is derived from accident years 2003 and prior; the total deficiency associated with these accident years is $26.8 billion.

* The deficiency estimates provided are based on the assumption that future levels of inflation will be commensurate with recent historical levels; any sudden increase in inflation could result in much higher deficiencies.