Enough in reserve? JLT Re fresh perspective
13 September 2016
- Correlation between pricing levels and accident year reserve adequacy is an important consideration in today’s marketplace.
- Cedents can secure a competitive advantage by anticipating cyclical changes but must act now.
JLT Re’s new Viewpoint Report – Enough in Reserve? – provides an empirical analysis of reserving trends and highlights evidence of net reserve deficiencies and that cedents should consider protective covers now rather than waiting until after the reserving cycle shifts unfavourably.
David Flandro, Global head of Analytics, JLT Re, said: “Our analysis shows calendar year reserve movements by quarter have generally been slow to respond to cyclical trends. For example, carriers, on average, released reserves for eight consecutive quarters in 1999 and 2000 even though accident years 1998 and 1999 were, by 2000 developing unfavourably. The sector experienced an extreme ‘danger phase’ during the late 1990s and the result was a period of strengthening in the early 2000s. Our research shows that this ongoing lack of alignment between market cycles and reserving patterns could create a new danger phase as carriers are continuing to release large amounts of reserves even though accident year experience indicates that redundancies are fast diminishing.”
Figure 1: Calendar Year Reserve Development by Quarter for Top 30 Global P&C Carriers Versus Accident Year Reserve Experience
Ed Hochberg, CEO North America, JLT Re, said: “This has significant implications on carriers’ financial performance and important repercussions on pricing. Our detailed analysis shows the strong correlation between calendar year reserve movements by quarter and pricing prior to 2010, with rates increasing in response to reserve strengthening and vice versa. The period between 2010 and 2012 saw increasing rates accompanying reserve releases, suggesting underwriters’ behaviour may not have been consistent with reserving reality. Since 2012, pricing has moderated but past correlations indicate this may not last long if sector reserves become deficient on a net basis.”
Figure 2: Calendar Year Reserve Development by Quarter for Top 30 Global P&C Carriers and Insurance Pricing Trends
The historical correlation between pricing levels and accident year reserve adequacy is an important consideration in today’s marketplace. Whilst cause and effect can sometimes interchange, rate softening in the (re)insurance sector is likely to be applying significant pressure on accident year reserving and overall adequacy trends.
David Flandro added: “Cedents can clearly secure a competitive advantage by anticipating cyclical changes and managing reserves accordingly. It is our belief that now is the time for cedents to consider protective covers as they can become more difficult to execute after the reserving cycle shifts unfavourably. JLT Re’s specialists are focused on providing the most efficient and economical reserve protections. By continuing to highlight these important trends, JLT Re is uniquely placed to inform the discussion and deliver the most innovative solutions to our clients.”
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ENQUIRIES & For A COPY OF THE REPORT:
Isabella Gaster, Head of Marketing Communications | T: (+44) 7920 586 032 |E: Isabella.Gaster@JLTRe.com
NOTES TO EDITORS:
JLT Re Viewpoint is JLT Re’s regular series of reports that comment on or give insight into key topics, occurrences or changes in the (re)insurance and broking market place.
About JLT Re
JLT Re’s trusted team of 700 colleagues worldwide combines market leading expertise and proprietary analytical tools with the freedom to challenge conventions.
Deep specialist knowledge and extensive experience of both the reinsurance market and clients’ own industries and sectors enables JLT Re to ask smarter questions, innovate and deliver better results tailored to meet client needs.
JLT Re is part of the Jardine Lloyd Thompson Group plc.
Head of Communications & Marketing, JLT Re