It’s likely that the insurance and reinsurance industry will find itself in “danger of releasing reserves” despite the suggestion that accident year redundancies are running low, suggesting the cycle has reached an inflection point, according to reinsurance broker JLT Re.
“Reserving levels are always under close scrutiny and this is especially true today as several carriers continue to release reserves to protect or enhance profits,” said Mike Reynolds, Global Chief Executive Officer (CEO) of JLT Re.
It’s a trend we’ve discussed numerous times at Artemis during the softening reinsurance cycle, and one that continues to exist and intensify as the benign loss experience continues and rates consistently decline across the reinsurance space.
With profits on both the investment and underwriting side of the balance sheet increasingly hard to come by, some in the space have been seen to aggressively release reserves to boost profits, and effectively mask true underwriting profitability.
Earlier in 2016 JLT Re cited that the global P&C industry wouldn’t always be able to rely on reserves as reliable source of earnings, owing to a notable moderation in redundancies and a rise in the occurrence of deficiencies throughout the space.
“JLT Re’s analysis shows that the reserving cycle has reached an inflection point and pressures are likely to intensify in the current market environment given the historical relationship between falling pricing and reserve deficiencies,” continued Reynolds.
In a new Viewpoint report, JLT Re examines calendar year reserve development by quarter since 1998 of the top 30 re/insurers, concluding, “the sector is once again likely in a danger phase in which reserves are being released faster than accident year experience would dictate, thereby flattening calendar year profitability.”
Prudently releasing prior accident year reserves is a common practice across the global insurance and reinsurance sector, but how sensible of an approach companies take and how aggressive they are in their releasing is an important factor.
Releasing reserves in a far more aggressive manner than is typical to boost returns might well support more desirable quarterly and annual profits for shareholders, but should the catastrophe loss environment normalise or a substantial event take place, some might find themselves in a far more difficult position than at present.
David Flandro, Global Head of Analytics at JLT Re, said: “By analysing quarterly calendar year reserve developments since 1998 for the top 30 global re/insurance companies and comparing them to accident year loss trends, pricing and previous cycles, our research shows that net sector deficiencies are now likely closer to adversely affecting the sector’s income statement than any time since the early 2000s.”
The general view across the industry appears to be that reserves are running thin, and with benign loss years limiting the ability to strengthen reserves, it’s possible that more and more reserve deficiencies will be realised in the coming months.
Furthermore, a lack of reserves in the ongoing softening landscape, which shows little sign of abating anytime soon, suggests re/insurers will have little room to manoeuvre should rates fall further and losses start to mount.
Again, a disciplined and prudent approach to reserving seems to be the message, along with purchasing efficient protection for adverse developments, as explained by Flandro.
“The clear implication is that now is the time to seek protection. It is always more economical to purchase adverse development cover (ADC) before deficiency trends are clearly manifest. Fortuitously, reinsurance pricing is at or near period lows in many medium and long-tail lines and cover is more easily obtained than it has been even in the recent past for those with the foresight to move quickly,” he said.