2022: 2021 Property‐Casualty Loss Reserves - Inflation Looming, No Time for Vacation
In this study, Conning analyzes Schedule P statutory data and presents its loss reserve findings for individual lines of business and aggregated for the industry. At year-end 2021, carried loss reserves were redundant by 5.4% ($40.5 billion), similar to our estimated redundancy of 5.5% ($37.7 billion) at year-end 2020.
Table of Contents:
Introduction
Executive Summary
Industry Overview - Common Themes
- Favorable Loss Development Continues in 2021
- Factors Influencing the 2021 Reserve Picture
- Summary Evaluation of Reserve Strength
- Loss Reserves by Company Size Segment
- Summary
Private Passenger Auto Liability/Medical
- Reserve Position Largely Unchanged; Favorable Development Continues
- Reserves for Recent Accident Years Remain Healthy
- Summary
Homeowners/Farmowners
- Improvement in Reserve Redundancy in 2021
- Summary
Workers’ Compensation
- The Business That Keeps on Giving
- Summary
Commercial Multiperil
- No Change in Reserve Redundancy in 2021
- Summary
Other Liability
- Reserve Position Continues to Improve
- Summary
Commercial Auto/Truck Liability/Medical
- Reserve Position Continues to Improve, but Still Slightly Deficient
- Summary
Medical Professional Liability
- Reserve Redundancies Have Largely Run Out
- Summary
Miscellaneous Lines
- Reserve Redundancy Shrinks Slightly; Favorable Reserve Development Continues
- Summary
Asbestos and Environmental
Industry Comparison with Small Insurers
- Reserves for Small Insurers Appear Adequate; Varies by Line
- Reserve Adequacy Levels Vary by Line of Business
- 2021 Calendar-Year/Accident-Year Reconciliation
- Summary
Industry Comparison with Midsized Insurers
- Reserve Position for Midsized Insurers Again Improves
- Reserves for Most Lines of Business Are Redundant
- 2021 Calendar-Year/Accident-Year Reconciliation
- Summary
Industry Comparison with Large Insurers
- Large Insurers’ Reserves Healthier Than the Industry’s
- Redundancies Persist in Most Lines of Business
- 2021 Calendar-Year/Accident-Year Reconciliation
- Summary
Appendix
- Methodology
- Glossary
- Additional Data
Introduction
For all the challenges the insurance industry faced in 2021, reserve adequacy was not one of them. Indeed, the industry appears to have maintained 2020’s equilibrium. Although inflation is becoming a challenge going forward, it had little impact on 2021 reserve results. Our analysis of reserves in this study looks back at year-end 2021; we do not forecast changes in adequacy. The industry may be entitled to a breather, but it is not time to take a vacation.
Our review of the property-casualty insurance industry’s loss reserve position suggests minimal change in 2021, when compared to our previous annual analysis. Overall, Conning believes the industry continues to carry sufficient reserves (gross of discount), with a modest degree of safety, under assumptions that claim settlement patterns will continue at their current pace. This is an important assumption that continues to be of concern in the period of low inflation and high volatility that apparently ended in 2021. With persistent inflation and/or more robust growth, these patterns are likely to change, thus adversely affecting loss reserve adequacy.
In 2021, the industry experienced favorable loss development of $6.0 billion, representing 0.9 percentage point of benefit on the calendar-year loss ratio. Based on the preliminary data used for this analysis, this marks the 16th consecutive year that the industry has had favorable development from prior accident years.
This is the fourth study in which we include estimates of the reserve adequacy levels by line of business for small and large companies. In prior years, we included a review of loss reserves for midsized insurers (companies with annual premiums between $100 million and $2 billion). For completeness, we felt it appropriate to include an analysis of these other segments of the industry. Note that in this year’s analysis we changed the minimum annual premium for large companies from $2 billion to $4 billion.
In this study, we again include a range of reserve adequacy for each core line of business and accident year. More information on these ranges is provided in subsequent sections in this study.
The performance of individual companies often can have a distorting influence on industry line-of-business results. In 2016, AIG, a leader in the commercial lines market, experienced significant adverse loss development in several lines of business, including workers’ compensation, other liability, and commercial auto liability. In 2017, AmTrust, a top ten writer of workers’ compensation, entered into a significant loss reserve development reinsurance agreement. Because of the impact of these companies on industry loss development patterns, in prior studies we made adjustments to account for their loss experience. In this study, we have included the experience for all companies with no adjustments to the data.
The lines of business that we review represent about 90% of the total reserves for the property-casualty industry. The remaining reserves are for lines of business that we do not review, including special liability, products liability, and nonproportional reinsurance. These nonreviewed lines have loss development patterns that are inherently volatile and, as such, do not lend themselves to the type of analysis we perform on the reviewed lines of business. The nonreviewed lines represent the remaining 10% of the industry’s reserves.
Conning’s loss reserve studies are based on an extensive analysis of Schedule P of the annual statement using data provided by S&P Capital IQ Pro (used with permission). Schedule P includes ten years of historical data with analysis of paid losses and incurred loss development for the casualty and liability lines. Analyzing and interpreting incurred loss (less IBNR) and paid loss data form the basis for making projections about ultimate loss liability.
Data analyzed in this study are based on a preliminary universe of company filings for year-end 2021, including annual statement information from S&P Capital IQ Pro.
Note, in this study, calendar-year losses and loss ratios are derived from Schedule P data and do not always reconcile exactly with comparable figures presented in other parts of the annual statement.