Reserving, Yields Will Challenge P/C Earnings

Chris Westfall
Chris Westfall

Global property casualty reinsurers and carriers will need to make difficult decisions as limited reserves releases and declining bond yields will challenge earnings over the next several years.

“Some longer-term clouds on the horizon [for the P/C industry] may temper competitive conditions in time,” said a report issued by Guy Carpenter on its GCCapitaldeas site.

Most dramatically, P/C carrier will lose the ability to strengthen earnings by plucking reserves into their balance sheets as prior year loss development turn sour, the report said.

“[The] high level of reserve releases is not expected to continue, and several indicators point to a declining benefit from this source of earnings in the future,” the report said.

According to Guy Carpenter, the difference between initial loss ratios and subsequent development is turning against the industry and “over” reserving is becoming a less common occurrence.

“The analysis seems to support the old adage that “good years get better, and bad years get worse,” the report explained, adding that the 2008 accident year has seen a significant increase in loss estimates.

“This does not necessarily portend an industry reserves deficiency, but it may suggest that more recent accident years may be less generously reserved.”

Having access to reserve releases was a huge benefit to the P/C industry over the past two years as the industry watched the asset side of their balance sheets deteriorate.

In fact, in 2008 and in the first nine months of 2009 the P/C industry experienced a 7.1 percentage point benefit to its calendar year combined ratio due to prior year reserve releases, as measured by the Guy Carpenter Reinsurance Composite.

Beyond reserving, the reinsurance industry’s primary investment choice of government backed securities are expected suffer. ‘In the near future, low-risk securities are likely to continue to produce low yields, further pressuring earnings of carriers,” the report said.

The impact on carrier earnings will not go unnoticed since the report estimates that for a typically insurer one percentage point of investment yield can generate over two percentage points of return on equity (ROE).