GuyCarp on Reserve Development

Actuary Jessica Leong at GCCapitalIdeas says the redundancy well is about dry:

The cycle turned on an accident year basis in 2004. Industry-wide accident year deterioration now appears imminent.

[snip]

Guy Carpenter’s expectation is that the U.S. P&C industry will continue to release reserves, but that 2012 reserve releases will be less than the 2011 release. Although we expect accident years from 2011 will show reserve deterioration, we believe accident years 2010 and prior will continue to release reserves, and this should offset any deterioration in financial years 2012 and 2013. The industry may therefore only start to see deteriorating reserves in 2014 financials or beyond.

Sounds like the industry-wide prediction is:

  • AY2010 and prior will continue to release reserves.
  • AY2011 estimates of ultimate will rise.
  • AY2012 and AY2013 will be booked too low.
  • Last calendar year and this (2012 and 2013) will show favorable reserve development. By CY2014, though, the deterioration in AY2011 and subsequent will be greater than the takedowns in AY2010 and prior.

Industry results will be available via SNL Financial in a couple of weeks, but through third quarter 2012, we can say:

  • Overall reserve development has been favorable by about $8.5B
  • AY2011 reserves have been reduced by $6.1B.

For CY2011, BTW, reserve development was a favorable $12.1B.

Here’s a chart showing how favorable development has broken by accident year:

favorable dop by year thru q32012

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