Decade ends with weaker reserves


Decade ends with weaker reserves


2019 should be a better year for the US P&C industry, but higher cat losses in 2020 are likely to push combined ratios back up again say AM Best’s Thomas Mount and Jennifer Marshall.

AM Best expects the financial performance of the US property/casualty (P&C) industry to show improvement for calendar year 2019, with results benefiting from a lower level of catastrophe losses and an improving rate environment in key lines, particularly short-tail property lines.

The calendar year combined ratio is expected to improve by 1.4 points, reflecting these lower catastrophe losses (which contributed 4.4 points to the combined ratio, compared with 9.8 points in 2017 and 5.7 points in 2018) and a lower expense ratio.

However, a return to a more normal level of catastrophe losses is expected to produce a higher combined ratio in 2020, even though we expect the industry to maintain underwriting profitability (Figure 1).






AM Best expects strong statutory surplus growth, reflecting improved underwriting performance and a significant increase in the industry’s unrealised capital gains position. As a result, the industry’s statutory surplus is projected to be over $858 billion at year-end 2019, a 12.1 percent increase from its year-end 2018 level, and up 11.2 percent from its year-end 2017 level.

The improved results in 2019 were most notable in the personal lines and US reinsurance segments (Figure 2). The US reinsurance segment comprises US-domiciled statutory reinsurance companies, and tends to have different experience from that of the global reinsurance market due to its overall business mix.






The commercial lines segment, meanwhile, posted relatively flat underwriting performance for the year. The improved results overall in 2019 and the underwriting profit expected in 2020 do anticipate adverse development being reported in a number of casualty lines.  


Adverse reserve development is a leading cause of insurer insolvency. As a result, reserve adequacy remains a critical rating issue for AM Best. Loss and loss adjustment expense (LAE) reserves are typically the largest liability on a P&C insurer’s balance sheet. Underestimating those liabilities may have a material negative effect on an insurer’s reported surplus, potentially resulting in adverse rating action.

Unexpected or larger than anticipated changes in an insurer’s reserve position may materially affect the assessment of the company’s balance sheet strength and enterprise risk management.

In last year’s analysis of the P&C industry’s total loss and LAE reserves, AM Best anticipated that the industry would report favourable reserve development in calendar year 2018 at a level similar to the amount reported in calendar year 2017. Instead, the industry reported $3.7 billion more favourable reserve development in 2018 than it reported in 2017, and consequently reported its 13th consecutive year of favourable prior year development (Figure 3).






The increase in favourable development in 2018 was primarily from the workers’ compensation line of business, which reported $3.3 billion more favourable development than in 2017. AM Best expects the industry to report another year of favourable reserve development in calendar year 2019, but at a lower level than the 2018 calendar year.

Reporting favourable prior year run-off does not automatically translate into weaker reserves in total. Conversely, reporting adverse prior year development does not automatically mean stronger reserves in total. This is because the total reserve also includes the addition of reserves for the newest accident year, which may be booked on a deficient or redundant basis that weakens, or strengthens, the overall reserve position.

Looking back on the past decade, AM Best estimates that total P&C industry loss and LAE reserves did weaken in nine of those years, for a total weakening of approximately $32 billion, with only 2016 appearing to have strengthened relative to the prior year-end reserve position (Figure 4).






For year-end 2019, AM Best estimates the P&C total net loss and LAE reserve deficiency at $33.7 billion, consisting of a $22 billion deficiency on core reserves and an $11.7 billion reserve deficiency on A&E reserves. Of the total $33.7 billion deficiency, $20.5 billion is due to statutory discounting, which AM Best considers a deficiency from full-valued reserves.

The estimated reserve positions vary widely by line of business, with workers’ compensation and other/products liability showing the largest overall deficiencies, and the medical professional liability, personal auto liability, and all other lines showing the largest redundancies (Figure 5). The estimated reserve deficiencies are based on industry statutory Schedule P cumulative paid and case-incurred loss and expense development, using AM Best’s internal loss-reserve model.










Industry data was adjusted to remove the distorting effects of large transactions such as commutations, loss portfolio transfers, adverse development covers, and prospective accounting treatment of retroactive reinsurance.

Overall industry reserves as of year-end 2019 are estimated to be $3.1 billion weaker than the reserves reported as of year-end 2018. A&E reserves are expected to strengthen $2.7 billion in 2019 and total core reserves are expected to weaken $5.8 billion. Within the core reserves, workers’ compensation, commercial auto liability, medical professional liability, commercial multi-peril, reinsurance assumed, and all other lines are expected to weaken in 2019, but that weakening should be partially offset by strengthening in other liability, personal auto liability, and homeowners.

This article is an excerpt from the Best’s March 2020 Market Segment Report “2020 Review/Preview: US Property/Casualty”, published March 2, 2020.

Thomas Mount is a senior director in the P&C ratings division of Am Best Rating Services. He can be contacted at:

Jennifer Marshall is a director in the P&C ratings division of AM Best Rating Services. She can be contacted at:


AM Best, Thomas Mount, Jennifer Marshall

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