An update from Global Strategic Advisory
April 2014
INDUSTRY RESERVE UPDATE — WHICH WAY IS
THE CYCLE TURNING?
With the release of the 2013 annual statutory statements, we have updated the Guy
Carpenter & Company reserve cycle analysis as shown in Figure 1 below. Overall,
the figures indicate a trend showing the industry continuing to release reserves
through this year, as two lines of business appear to exert the greatest impact on the
cycle.
The updated data is shown as the dotted line segment.
Guy Carpenter is looking at the reserve cycle in a different way: by studying the
booked ultimate loss by accident year. We choose accident year because actuaries
typically analyze losses according to their year of accident. The estimate of the
ultimate loss for a particular accident year ideally should not change over time if the
initial estimate was correct. However, using U.S. industry data, we find that as a
particular accident year is re-estimated periodically, a cycle appears.
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How do I read this chart?
For those new to this cycle chart, this graphic analyzes the restatement of reserves by
accident year. Why accident year instead of fiscal year? We believe that accident
year provides more insights into cycle development. After all, actuaries estimate
reserves by analyzing losses by accident year.
The flat line at 1.00 is our initial estimate of ultimate loss for each accident year. That
is the estimate made at the end of each of the accident years. Each subsequent line
shows how that estimate changes over time. Lines above 1.00 show when loss
estimates increase (deteriorating reserves) and lines below 1.00 indicate when loss
estimates decrease (releasing reserves). This reveals one important trend — those
accident years that begin to get worse, keep getting worse, while accident years that
begin to get better, continue to improve — almost without fail.
What is this reserve cycle graph telling me?
You can see that accident year 2012 has released more than accident year 2011, not
less. Should we expect more releases going forward? To answer this, we will look at
the drivers of improvement for accident year 2012.
What is driving the continued release of reserves?
Seventy percent of the improvement for accident year 2012 can be attributed to two
lines: homeowners and private passenger auto.
In Figure 2 on the next page, the graphs for both of these lines do not exhibit a clear
cycle as do graphs for many liability lines. Because the pattern lacks a clear trend, it
is not possible to say that accident year 2013 will also show reserve releases in 2014.
We speculate that property catastrophe issues may be behind the release of reserves
for the homeowners line for accident year 2012. Hurricane Sandy made U.S. landfall
on October 29 of that year, so there was still a lot of uncertainty on the ultimate cost
at year-end.
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Liability lines that appear to be improving: Workers compensation, medical professional liability and commercial multi
peril
Workers compensation reserve deterioration has caused some headaches in the last
year. However, examining Figure 3, the cycle appears to have turned around. But
note that around 1987 when the cycle turned, it appeared to show improvement only
to turn around and deteriorate some more.
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Similarly, in Figure 4 we see that medical professional liability and commercial multi
peril appear to be making tentative turns to show more reserve release in accident
year 2012 than we expected.
Liability lines that appear to be deteriorating: Commercial auto
liability
The commercial auto liability line has been deteriorating since accident year 2010 and
continues to deteriorate. Insurers are seeing an increasing “frequency of severity” –
more large severity claims than expected.
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What does this mean for financial year 2014?
Given the trends in the cycle, it is useful to break this question down into two sections:
(1) What will happen to the reserves for accident years 2012 and prior?
(2) What will happen to the reserves for accident year 2013 over the next year?
Accident Years 2012 and prior:
Accident years 2003 to 2012 for all lines in total have released reserves to date, so
we can say that they are very likely to continue to release reserves in financial year
2014.
Accident Year 2013:
What happened in accident year 2012 can provide clues to reserve momentum for
2013.
Accident year 2012 released reserves last year, largely from the homeowners and
private passenger auto lines. These two lines have release or deterioration of
reserves that are more random than cyclical. Therefore, it is difficult to predict the
outcome of accident year 2013 results for these lines.
Accident year 2012 also released reserves at an increased rate for workers
compensation, medical professional liability and commercial multi peril. This bodes
well for accident year 2013 reserve movements in 2014 for these lines.
Want to find out more?
Are you an insurer that writes casualty lines? If you are, then your reserves are likely to follow
the cycle. To help you through the reserve cycle, Guy Carpenter has created an innovative
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predictive model for reserves, called MetaRisk® Reserve™ . Contact your local Guy
Carpenter broker to find out more.
Should you have any questions, please contact:
Jessica W.K. Leong,
Lead Casualty Specialty Actuary
+1 917 937 3194
[email protected]
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U.S. Patent number 8,452,621 B2 and patent pending
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About Guy Carpenter
Guy Carpenter & Company, LLC is a global leader in providing risk and reinsurance
intermediary services. With over 50 offices worldwide, Guy Carpenter creates and executes
reinsurance solutions and delivers capital market solutions* for clients across the globe. The
firm’s full breadth of services includes line-of-business expertise in agriculture; aviation;
casualty clash; construction and engineering; cyber solutions; excess and umbrella; life,
accident and health; marine and energy; medical professional liability; political risk and trade
credit; professional liability; property; retrocessional reinsurance; surety; terrorism and workers
compensation. GC Fac® is Guy Carpenter’s dedicated global facultative reinsurance unit that
provides placement strategies, timely market access and centralized management of
facultative reinsurance solutions. In addition, GC Analytics®** utilizes industry-leading
quantitative skills and modeling tools that optimize the reinsurance decision-making process
and help make the firm’s clients more successful. For more information, visit
www.guycarp.com.
Guy Carpenter is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC),
a global professional services firm offering clients advice and solutions in the areas of risk,
strategy and human capital. With 54,000 employees worldwide and annual revenue of $12
billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in
insurance broking and risk management; Mercer, a global leader in talent, health, retirement,
and investment consulting; and Oliver Wyman, a global leader in management consulting.
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