March 3rd, 2011

Top Stories Covering Loss Reserves

Posted at 1:00 AM ET

Here we highlight GC Capital Ideas’ most popular stories covering loss reserves.

Chart: Property & Casualty Accident Year Reserve Development: Accident year loss experience is beginning to show signs of lower reserve margins. The chart below shows U.S. P&C industry reserve development by accident year since 2000. The reserving cycle is evident in the graph with adverse accident year loss development during the “soft market” years of 2000 and 2001 and favorable development between 2003 and 2007. The orange line in the graph shows the average initial loss ratio pick. The old reserving adage that “good years get better and bad years get worse” appears to be borne out here.

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Chart: Sustainability of Loss Reserves:  Historically, one of the “big cats” has been sector under-reserving, which served as the backdrop for the last hard market. Over the last four years, reserve releases have featured prominently in the reinsurance sector and have continued to do so up until the third quarter of 2010. The chart below shows the contribution to reserve releases on the Guy Carpenter Bermuda Reinsurance Composite combined ratios from 2005. It is notable that the benefit from reserve releases has ticked up in the first nine months of 2010 by one full percentage point, to 8.8 points on the loss ratio. This has occurred during a year when many projected reserve releases would diminish.

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Chart: Incurred But Not Reported Levels a Measure of Reserving Trends:  A clue which could point to a shift in reserving trends may be evident in U.S. P&C industry percentage of first year incurred but not reported (IBNR) figures, which, all else equal, is a measure of reserving conservatism. In the chart below, a trend of potentially diminishing conservatism can be seen. It is significant that the industry is, in aggregate, back to levels of around 30 percent - levels previously seen in the last soft market.

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Chart: At Monte Carlo Rendez-Vous, Chris Klein on Modest Adverse Reserve Development:   In his presentation at the Guy Carpenter Monte Carlo Rendez-Vous Press Briefing, Chris Klein spoke about reinsurance pricing. Factors that could put upwards pressure on pricing continue to lurk in the wings. Support from reserve releases appears to be waning and Guy Carpenter’s analysis of statutory data for the U.S. property/casualty industry already reveals modest adverse development for the 2008 accident year in 2009.

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Modeling Loss Reserve Risk: Loss reserves are one of the most difficult risks on insurance companies’ balance sheets. What about loss reserving presents such difficulty?  Loss reserves are essentially forecasts of losses that are going to be paid five, 10 and 15 years from now. Since the future cannot be predicted with perfect accuracy, reserves, of course, are difficult to estimate.

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