3 key takeaways from Morgan Stanley's 2017 Reserve Analysis
As we near the halfway point of 2018, it's important to look back at the previous year and see how the insurance industry is doing financially.
The insurance industry was hit hard in 2017. Catastrophic weather events struck like never before, cyber attacks were on the rise, and the insurance industry had to withstand it all.
As we near the halfway point of 2018, it’s important to look back at the previous year and see how the insurance industry is doing financially. There are no guarantees in 2018, and the industry would be wise to be prepared for a number of scenarios.
Morgan Stanley recently released a report analyzing the property & casualty insurance industry from a financial perspective. Their proprietary annual actuarial analysis of industry reserves reveals a $4.3 billion deficiency in 2017, and they’ve reduced their 2018-2019 reserve estimates by 3-5% on average.
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Morgan Stanley estimates an actuarially reasonable range of reserves between $605.8 billion and $633.7 billion. Their analysis shows an overall deterioration of $1.8 billion year-over-year with the bulk of the deterioration concentrated in Other Liability Occurrence and Other Liability Claims-Made.
Morgan Stanley also estimates that five of the top six industry reserves lines to be deficient, including: Workers’ Compensation (23% of carried reserves; $449 million deficient), Personal Auto Liability (18%; $58 million), Other Liability Occurrence (14%; $6.4 billion), Other Liability Claims-Made (6%; $2.9 billion) and Commercial Auto Liability (5%; $1.5 billion).
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Workers’ comp, short-tailed lines key to development
Of the $12 billion of favorable development (excluding AIG), $11.3 billion came from two distinct sources: Workers’ Compensation ($5.1 billion) and short-tailed lines ($6.2 billion). While some lines are more at risk than others (specifically, Other Liability and Commercial Auto Liability), Morgan Stanley notes again that the overall industry reserve position remains a function of those short-tailed lines.
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Expect slower reserve releases
In Morgan Stanley’s view, large industry reserve releases are not sustainable. For example, the sustainability of large reserve releases from short-tailed lines and Workers’ Compensation — of the line’s $5.1 billion of favorable development in 2017, $1 billion came from the most recent accident year — could be challenged by modest pricing and a potential uptick in loss cost inflation.
There have been instances of adverse development at individual carriers and select lines — Personal and Commercial Auto, for example — in recent periods. Morgan Stanley predicts heightened earnings risk from lower reserve releases or even balance sheet risk from reserve charges for the industry.
After record catastrophe losses in 2017, the industry sees improving commercial P&C pricing. The “silver lining” of worsening reserves is that they could strengthen the case for further rate increases. But much of 2018 remains to be seen, and how the P&C insurance industry plans to leverage its financial standing will be critical to its future successes.
Related: Global insured losses from disasters in 2017 were highest ever, Swiss Re finds