P&C insurance sector reserve deficiency deteriorates

Property/casualty (P&C) insurance sector reserve deficiency deteriorated to $4.3 billion in 2017 from $2.5 billion in 2016, according to Morgan Stanley research.

The investment bank has reduced its 2018-19 reserve estimates for the industry by 3-5 percent on average. Analysts see deficiencies in 5 of the top 6 reserve lines. Other Liability lines deteriorated $3.7 billion year on year while Commercial Multi-Peril, Workers' Compensation, and Personal Auto Liability showed modest improvement. Among the bank’s coverage, WR Berkley and Travelers have the thinnest cushion, according to the research note.

Although industry reserves, at $615 billion in 2017, remain still well within Morgan Stanley’s estimated actuarial range of $606 billion-$634 billion, a thinner reserve cushion could lead to a "slippery slope" toward lower reserve releases, or even adverse development. Since 2010, the P&C industry has released around $73 billion of reserves (around $9 billion per year), providing about 20 percent of industry earnings. Large reserve releases in the face of deteriorating cushion heighten reserve risks - at best, an earnings headwind, at worse, balance sheet erosion, the analysts noted.

After record catastrophe losses in 2017, the industry sees improving commercial P&C pricing. The "silver lining" of worsening reserves is that they could strengthen the case for further rate increases.

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