The New York-based ratings group’s report takes a close look at the property/casualty insurance industry’s reserve adequacy, with analysts noting that the industry’s loss reserve position has benefited from the past hard market. However, Fitch analysts say that the industry’s reserve redundancy is starting to decline as the soft market unfolds.
“A lot of the loss reserves in from the peak of the soft market in the 1990s developed very unfavorably for insurers,” said James Auden, a Chicago-based Fitch financial analyst. “Business was way under priced and insurance companies didn’t anticipate the loss-caused trends. Sept. 11 led to tremendous changes in underwriting and pricing…(insurers) reserve management became more conservative and loss reserves have grown more favorably since then.”
Fitch predicts that in the near term, insurers will continue to benefit from favorable reserve development from prior underwriting periods, but that accident-year loss ratios are likely to increase materially from prior years as market conditions change.
Reserving challenges are likely to increase as the soft market unfolds, according to the Fitch report. Insurers will likely loosen policy terms and conditions as competition increases, the report states. In addition increased inflation makes it even more difficult for insurers to estimate loss costs, Auden said.
“Inflation is a significant challenge to loss reserves,” he said. “When unexpected inflation costs go up, (insurers) tend to underestimate loss costs.”
For year-end 2007, Fitch projects that the industry’s net loss and loss adjustment expense reserves were between $900 million and $9.0 billion redundant. Meanwhile, Fitch says that the industry’s reserves are deficient in several areas, including asbestos, where reserves were $4.7 billion to $9.3 billion deficient at year-end 2007, environmental, $2.3 billion to $3.2 billion, and latent liability exposures, $2.0 billion to $4.0 billion.