Analysts at Assured Research delivered some surprises in a report on property/casualty insurance industry loss reserves Monday, finding that reserves are $28 billion redundant and predicting that some hard market pricing will stabilize or diminish this year.

Explaining how the industry loss reserve position reversed from Assured Research’s year-end 2019 estimate of a $5 billion deficiency to a redundancy more than five-times bigger at year-end 2020, William Wilt, president of Assured Research, and Alan Zimmermann, managing director, noted that much of the difference lies in the COVID-plagued 2020 accident year.

In fact, comparing their estimates of fully developed (ultimate) loss ratios for that year to the ultimate loss ratios implied by the industry reserve position for three of 17 line-of-business categories they reviewed, the report reveals that roughly $11 billion of the $28 billion figure—41 percent of the estimated redundancy—relates to industry conservatism for the 2020 accident year. The three lines were homeowners, private passenger auto and auto physical damage.

Since the three lines are short-tailed lines, “our work will be proven right—or wrong—probably by the middle of this year,” Wilt said, noting, however, that the conservative picks are evident in several longer-tailed lines as well.

How conservative? Wilt and Zimmermann demonstrate the degree of conservatism by comparing the amount of future loss development implied by the industry picks (12 months to ultimate loss development factors) to much lower actual historical 12-ultimate development that played out for prior years. As an example, for private passenger auto liability, the reported loss ratio as of the end of last year was 41.3. Industry carried reserves for the line indicate a 60.6 ultimate loss ratio, implying a 12-ultimate loss development factor of 1.47 (=60.6/41.3). In contrast, for accident years 2017-2019, the average 12-ultimate development factor was 1.38.

Even the Assured Research analysts tried to be conservative here, with a 57.9 ultimate loss ratio pick implying a development factor of 1.40.

What does all the redundancy in loss reserves mean in terms of pricing?

While a “meaningfully redundant reserve position would portend an end to the hard market,” the two analysts don’t think the hard market is over for all P/C insurance lines. But for lines like private passenger auto and commercial auto, decelerating rate increases could be in the cards for 2021.

In personal auto, in particular, where the 2020 reported accident loss ratio of 41.3 is more than nine points lower than the 2019 accident year loss ratio was at the end of 2019, clamor among regulators and policyholders is already in motion to give back more to consumers from the industry profit pie. And “if auto insurers release material levels of reserves on accident year 2020 during the first half of 2021, the ire of…regulators will only rise,” the analysts predict in their report.

The report includes commentary on the Assured Research analysts’ reserve estimates and their views on likely pricing implications for the three short-tailed lines, and for workers comp, commercial auto liability and other liability (occurrence and claims made), as well as a summary of estimates for the remaining 10 lines.

Last year, when Assured Research published a similar report analyzing the industry reserve position as of year-end 2019, much of the $5 billion deficiency they estimated was in the other liability and commercial auto lines. A month later, when everyone was starting to assess the impacts of the pandemic, the analysts speculated that COVID-19 disruptions in legal and health care systems would create an “undecipherable mess” for reserving actuaries who would be evaluating reserve need during 2020. (See related article, “COVID-19: On Disrupted Diagonals and Lengthening Tails.”)

This year, they reported that while there was some COVID-induced disruption on the 2020 diagonal of actuarial loss reserve triangles, claim activity did continue across most older years and lines of insurance.

Wilt and Zimmermann will provide more details of the year-end 2020 analysis in an article scheduled to be published in the second-quarter edition of Carrier Management’s print magazine in May. In advance of that, the full report is available from Assured Research.