History shows that the insurance market is cyclical, and this is especially true for casualty lines of business. As long-tail casualty lines, the ultimate profitability of a year is not known for many years as changing loss trends and causes may not be recognized until it is too late to protect against adverse development.
The casualty marketplace now finds itself in such a position, according to Christopher Ross, Managing Director, Guy Carpenter. The chart below shows this cyclicality since 2000 for commercial auto, other liability occurrence & claims made, products liability and medical professional.
In the chart, the baseline represents the normalized original loss ratio selection for each year: the industry’s collective initial loss ratio selection on anticipated performance in a particular year. The lines then show how each year actually developed over a 10-year period. When the line moves above the baseline, the loss ratio selection has increased, representing adverse development, and when it moves below the baseline, the ultimate loss ratio has decreased, representing positive development and reserve releases.
