CHICAGO--(BUSINESS WIRE)--Fitch Ratings analysis of U.S. property/casualty industry loss reserves concludes that overall reserves remain adequate at year-end 2013, and in a similar position to the prior year. Loss reserves are the largest liability on insurers' balance sheet and a key source of potential capital volatility. A new special report provides details on Fitch's analysis of industry reserve adequacy, sources of reserve strength and weakness by product segment, and commentary on reserve development experience.
The analysis also includes a stress test analysis of industry loss reserve adequacy, revealing that the industry's current capital position can withstand considerable reserve volatility, though the levels of reserve stress considered would have varying effects on individual insurers.
Fitch estimates that industry reserves were adequate at year-end 2013, within an estimated range of approximately plus or minus 2% of carried reserves. Relatively steady loss cost trends and low inflation have promoted loss reserve stability over the last several years. Over the last two years, insurers benefited from considerable reported accident-year loss ratio reductions fueled largely by successive rounds of premium rate increases in most product segments. Fitch's analysis indicates that the 2013 accident-year is less likely to develop unfavorably relative to other recent underwriting periods.
Reserve strength of individual market segments differ to some degree. Medical professional liability and other liability - occurrence lines are estimated to have redundant reserve levels over the latest 10 accident years. In addition, personal lines segments, private passenger automobile liability and homeowners' multi-peril are also estimated as redundant.
In contrast, workers' compensation and commercial auto liability segments continue to have projected reserve deficiencies. These lines have experienced periods of unfavorable development over several recent accident years. Latent asbestos and environmental (A&E) exposures also continue to represent a source of unfavorable reserve development. In recent years, an increasing number of U.S. insurers opted to purchase reinsurance coverage to substantially reduce uncertainty tied to A&E claims.
For the eighth consecutive calendar year, property/casualty industry prior period loss reserves have developed favorably, positively affecting statutory profitability. The magnitude of favorable development continued to decline moderately in 2013, and is anticipated to slow further in 2014 and going forward as more recent underwriting periods are unlikely to generate reserve redundancies equivalent to past hard market accident years 2004-2007 which now represent a smaller percentage of overall loss reserves.
The full report 'U.S. Property/Casualty Industry Loss Reserve Adequacy' dated Sept. 11, 2014, is available at 'www.fitchratings.com' under 'Insurance' and 'Special Reports'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Property/Casualty Industry Loss Reserve Adequacy