Writing in National Underwriter, Milliman actuaries Richard Lord and Stephen Koca look at the how much current medmal results are propped up by releases of prior year reserves.
As the accompanying bar graph indicates, reserve releases in each of 2008 and 2009 accounted for an almost 25 percentage point reduction in the MPL industry aggregate combined ratio, up from a 20 percentage point reduction in 2007, and sharply up from 5-to-10 percentage point impacts in 2005 and 2006, respectively.
(Click on the chart to enlarge.) To spell out what the actuaries are saying: The blue line shows the reported combined ratio for medmal insurers. The bars show the accident year result. At any point, the difference between the value along the blue line and the height of the bar shows how adjusments of prior-year results affected the combined ratio.
And in recent years, the combined ratio has been propped up by reserve releases – 25 points in 2009.
Well, clearly that can’t continue indefinitely. And it’s going on throughout property-casualty insurance. Business is underpriced but as long as there are excess loss reserves to release, insurers can post attractive results.
But the actuaries point out that medmal has a couple of twists that could turn nasty quick:
Premium increases of the most recent hard market were not as large as those of the previous cycle and took longer to develop. Moreover, reserves have been released at a faster pace.
There are also signs that the improvements in claims frequency—which happened to occur as insurers started to take hefty rate actions in the early 2000s, and contributed to insurers’ recent good fortune—may have started to abate.
The actuaries also point out that the judicial environment has gotten chilly, pointing to an Illinois Supreme Court decision overturning caps on damages.
As it is, the actuaries suggest that combined ratios will surpass 100 by 2014. But if frequency climbs or judges whack away at tort reform, “combined ratios of 130 or more may be here even sooner than anyone realizes.”
(h/t CAS Facebook page)