May 5th, 2014

Industry Reserve Update — Which Way Is The Cycle Turning?

Posted at 1:00 AM ET

leong-jessica-bio-sep-2013Jessica Leong, Lead Casualty Specialty Actuary

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With the release of the 2013 annual statutory statements, we have updated the Guy Carpenter reserve cycle analysis as shown in the chart. Overall, the figures indicate a trend showing the industry continuing to release reserves through this year, as two lines of business appear to exert the greatest impact on the cycle.

The updated data is shown as the dotted line segment.

Guy Carpenter is looking at the reserve cycle in a different way: by studying the booked ultimate loss by accident year. We choose accident year because actuaries typically analyze losses according to their year of accident. The estimate of the ultimate loss for a particular accident year ideally should not change over time if the initial estimate was correct. However, using U.S. industry data, we find that as a particular accident year is re-estimated periodically, a cycle appears.

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How do I read this chart?

For those new to this cycle chart, this graphic analyzes the restatement of reserves by accident year. Why accident year instead of fiscal year? We believe that accident year provides more insights into cycle development. After all, actuaries estimate reserves by analyzing losses by accident year.

The flat line at 1.00 is our initial estimate of ultimate loss for each accident year. That is the estimate made at the end of each of the accident years. Each subsequent line shows how that estimate changes over time. Lines above 1.00 show when loss estimates increase (deteriorating reserves) and lines below 1.00 indicate when loss estimates decrease (releasing reserves). This reveals one important trend - those accident years that begin to get worse, keep getting worse, while accident years that begin to get better, continue to improve - almost without fail.

What is this reserve cycle graph telling me?

You can see that accident year 2012 has released more than accident year 2011, not less. Should we expect more releases going forward? To answer this, we will look at the drivers of improvement for accident year 2012.

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