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Aon Benfield Study: Industry Reserve Redundancy $22 Billion at Year-End 2010

Posted on 16 Jun 2011

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Aon Benfield, the global reinsurance intermediary and capital advisor of Aon Corporation, has updated its U.S. industry reserve adequacy study with year-end 2010 data.

The new study, compiled by Aon Benfield Analytics, shows that the overall industry redundancy is USD22.0 billion versus USD21.9 billion at year-end 2009, after the industry released USD10.5 billion of reserves during 2010. The study is based on an analysis of U.S. statutory Schedule P triangles. It builds up the total industry position from a by-line analysis.

The indicated USD22.0 billion of reserve redundancy across all lines of business is split between personal lines USD6.5 billion, commercial property USD1.5 billion, commercial liability USD9.9 billion, and workers compensation USD6.5 billion, offset by a deficiency in financial guaranty of USD2.4 billion.  Aon Benfield estimates that USD9.8 billion of favorable development will emerge in 2011. At the current run-rate the redundancy will be eliminated in 2.2 years.

Last year's study split the USD21.9 billion reserve redundancy as personal lines USD6.0 billion, commercial property USD3.8 billion and commercial liability USD14.2 billion, offset by deficiencies of USD0.8 billion in workers compensation and USD1.4 billion in financial guaranty. It predicted that favorable development would emerge at USD9.5 billion per year, giving 2.3 years of further releases at the current run rate. In fact, carriers released USD10.5 billion of total reserves during 2010.

The 2010 emergence of USD10.5 billion was at the 36th percentile of the estimated range of outcomes. The range is based on a Monte Carlo simulation for accident years 2009 and prior, calibrated to the December 31, 2009 statements. The 90th percentile range for 2010 emergence was from USD22 billion favorable to USD9 billion adverse emergence, so the actual favorable development in 2010 was not an unforeseeable or unexpected outcome. The 90th percentile range for 2011 is similar, at USD21 billion favorable to USD8 billion adverse.

Financial guaranty showed USD0.4 billion favorable development during 2010, compared to USD7.0 billion favorable development in 2009, but USD12.6 billion adverse development in 2008. The overall reserve position for financial guaranty is now USD2.4 billion deficient, compared to an indicated deficiency of USD1.4 billion in the 2009 study.

The study uses standard reserving procedures including the chain ladder method applied to paid and case incurred loss development triangles. In addition, the adequacy of all prior year reserves is estimated using a decaying average payment methodology. The study provides directional evidence about the aggregate adequacy of industry reserves and tries to capture effects that may not be apparent or credible in any individual company's data.

It is not an actuarial reserve opinion.

AIG, which represents 10% of total U.S. statutory reserves, published additional disclosures outlining adjustments to their statutory Schedule P triangles in their recently filed combined annual statement. These adjustments cover large portfolio transfers, reinsurance commutations and additional line of business splits, all of which can cause material distortions to the mechanically generated indications. To incorporate the effect of these disclosures on the industry reserve position, Aon Benfield Analytics separately analyzed the industry excluding AIG and the disclosure-adjusted AIG triangles to derive a total industry view.

While the estimated redundancy for the industry is USD0.1 billion higher than the 2009 estimate (despite USD10.5 billion released in 2010) without adjusting for AIG's Schedule P disclosures the estimated redundancy for 2010 would be reduced to only USD13.9 billion. AIG's disclosures have the greatest impact on workers' compensation, where they account for most of the shift from USD0.8 billion deficiency in 2009 to the USD6.5 billion redundancy in 2010. AIG represents 13% of the industry workers' compensation reserves.

This analysis is based on nominal losses as reported in Schedule P, and does not include tabular and/or non-tabular discounts as a reduction in reserve adequacy for workers' compensation. Other industry studies completed on workers' compensation may include these discounts.
Stephen Mildenhall, Chief Executive Officer of Aon Benfield Analytics, said: "This study confirms that there is still a headwind against a broad market hardening from continued reserve releases.  In Q1 2011, public companies released a further USD4.6 billion of reserves compared to USD5.7 billion in 2010. These releases reflect good loss experience from the hard market years and continued favorable frequency trends across all liability lines in the US."

Aon Benfield Analytics' study relies on early aggregations of industry statutory reports, and is subject to change as more combined reports are filed with the data aggregating service, SNL. The estimates are subject to considerable uncertainty and actual reserve emergence could vary materially from the amounts shown here. Both AIG and Chartis are clients of Aon Benfield.