Aon Benfield Study: Insurers’ Reserve Redundancy Estimated to be $11.7B

Aon Benfield, a global reinsurance intermediary, has updated its U.S. insurance industry reserve adequacy study with year-end 2011 (YE2011) data.

The study, compiled by Aon Benfield Analytics, reveals that at YE2011 insurers’ reserves were redundant by $11.7 billion – or 2% of total booked reserves – compared with $22 billion at YE2010, after the industry released $12.7 billion of reserves during 2011.

The YE2011 figure is comprised of redundancies in personal lines of $7.6 billion (YE2010: $6.5 billion); commercial property of $1.0 billion (YE2010: $1.5 billion); and commercial liability of $6.7 billion (YE2010: $9.9 billion), offset by deficiencies in workers’ compensation of $1.7 billion (YE2010: $6.5 billion redundant), and financial guaranty of $1.8 billion (YE2010: $2.4 billion).

The effects of the U.S. economic downturn and less favorable trends in loss frequency and severity have resulted in a significant shift in the level of reserve adequacy for workers’ compensation compared to the YE2010 study. Workers’ compensation has developed adversely by $2.1 billion since 2009.

Aon Benfield Analytics estimates that $7-10 billion of favorable reserve development will occur in 2012, and that the reserve redundancy will be eliminated in 1.1 years at the current run-rate.

The reserve redundancy in the two most recent accident years has decreased from $11 billion to $3 billion, reflecting continued market pricing pressures. At YE2011, accident years 2010 and 2011 accounted for 45 percent of the total industry booked reserves.

Stephen Mildenhall, chief executive officer of Aon Benfield Analytics, said: “The headwind against a broad market hardening from reserve releases continued in Q1 2012, as public companies released an additional $4.2 billion of reserves, compared to $4.6 billion in 2011. However, the forecast is for the winds to abate over the next four to six quarters, with the hard market years slowing and the more recent accident years booked less conservatively.”

The reserve adequacy study is based on early aggregations of insurers’ statutory reports, and is subject to change as more combined reports are filed with the data aggregating service, SNL. The estimates are subject to considerable uncertainty and actual reserve emergence could vary materially from the amounts detailed. It is not an actuarial reserve opinion.

Source: Aon Benfield