Best’s Special Report: Heightened Risk Landscape Creates New Challenges for Reserve Management
April 16 2024 - 8:24AM
Business Wire
Moving past the COVID-19 era economic fallout has given rise to
indications of worsening reserve risk as insurers report financial
results for fourth quarter and full-year 2023, according to a new
AM Best report.
A new Best’s Special Report states that the risk landscape
evolving from the pandemic is one that includes escalated reserve
risk, especially for the long-tail lines of insurance business. For
some business lines, even a relatively small deficiency in current
reserves could have a material impact on policyholders’ surplus and
a company’s financial position. Projecting a company’s future
bottom line and financial needs is pivotal in moving forward, with
reserves estimations being both an art and a science.
“Theoretical reserving methods may involve complicated math and
risk modeling, but the process enables the actuary to arrive at a
best estimate that will be used by management to arrive at a final
number reported on a company’s balance sheet,” said Christopher
Graham, senior industry analyst, Industry Research and Analytics,
AM Best.
However, macroeconomic factors stemming from main COVID-19 years
(2020-2022), created a hiatus in the economic and insurance
ecosystem. The report notes that construction, travel, education,
commerce, and the work environment went through radical changes,
along with governmental decrees, regulations, and the legal system
and insurance shifts that followed. This distorted the historical
patterns that actuaries depend on to make decisions about the
future.
In addition, economic inflation spiked. The average annual
inflation rate was 2.55% from 2000 to 2023, and 1.45% for the years
2015 to 2019—accident years that already had adverse reserve
development. However, the average rate of inflation was 5.6% from
2021 to 2023. Actuaries use inflation estimates as one of many
factors to predict increases in severity and losses. Given the
inflationary spikes, severity could be underestimated, leading to
actuaries to raise prior projections.
Several other factors are contributing to the reserve risk
pressures, including:
- The rise in punitive damages in class action lawsuits brought
against large corporations, which are complicating loss
estimates;
- The growth in litigation financing firms, which are utilizing
more technology with the outcomes creating distortions in payment
patterns;
- Ubiquitous chemicals such as PFAS and microplastics have caused
many lawsuits. In addition, climate-related casualty litigation and
mental health issues related to technology addiction have the
potential to create issues in general liability, product liability,
and clean-up costs.
To access the full copy of this market segment report, please
visit
http://www3.ambest.com/bestweek/purchase.asp?record_code=342048.
AM Best is a global credit rating agency, news publisher and
data analytics provider specializing in the insurance industry.
Headquartered in the United States, the company does business in
over 100 countries with regional offices in London, Amsterdam,
Dubai, Hong Kong, Singapore and Mexico City. For more information,
visit www.ambest.com.
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Christopher Graham Senior Industry Analyst,
Industry Research and Analytics +1 908 882 1807
christopher.graham@ambest.com
David Blades Associate Director, Industry
Research and Analytics +1 908 882 1659
david.blades@ambest.com
Christopher Sharkey Associate Director, Public
Relations +1 908 882 2310
christopher.sharkey@ambest.com
Al Slavin Senior Public Relations Specialist +1
908 882 2318 al.slavin@ambest.com