JLT Re has warned that the (re)insurance market is in danger from reserve adequacy and believes the industry risks releasing reserves despite accident year experience suggesting redundancies are running dry.
In a viewpoint entitled Enough In Reserve, JLT Re noted that deficient reserves are arguably the (re)insurance sector's largest potential exposure.
The broker has analysed quarterly calendar year reserve developments since 1998 for the top 30 global (re)insurance companies and compared them to accident year loss trends, pricing and previous market cycles.
According to David Flandro, global head of analytics at JLT Re, the 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".
Reserving levels are under particular scrutiny currently because several carriers continue to release reserves to protect or enhance profits. Rate softening in the (re)insurance sector is likely to be applying significant pressure on accident year reserving and overall adequacy trends.
JLT Re's analysis suggests that the reserving cycle has reached an inflection point. Pressures are likely to intensify in the current market environment given the historical relationship between falling pricing and reserve deficiencies, said the broker, explaining that there have been some notable instances of reserve strengthening in recent quarters.
Mr Flandro said: "Our analysis shows calendar year reserve movements by quarter have generally been slow to respond to cyclical trends. For example, carriers, on average, released reserves for eight consecutive quarters in 1999 and 2000 even though accident years 1998 and 1999 were, by 2000, developing unfavourably. The sector experienced an extreme 'danger phase' during the late 1990s and the result was a period of strengthening in the early 2000s. Our research shows that this ongoing lack of alignment between market cycles and reserving patterns could create a new danger phase as carriers are continuing to release large amounts of reserves even though accident year experience indicates that redundancies are fast diminishing."
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