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Insurance companies monitor reserves and inflation



Commercial insurance industry reserves remain solid and broadly continue to produce favorable developments, despite high inflation, industry sources say.

Sustained inflation over the long term, however, could change insurers’ calculus as they keep a watchful eye on the effects of rising costs.

By examining current inflation levels, insurers and reinsurers “can create a context for evaluating inflation rate changes in the recent past and project scenarios for future changes by business category,” said Bill Miller, chief actuary for Aspen Insurance Holdings Ltd. Bermuda.

“You have to think about the components of core inflation that most affect a particular industry. For example, for commercial vehicles, it̵

7;s crucial to take into account the increase in the cost of car repairs and rentals,” says Miller.

The consumer price index and producer price index are general economic indicators, “but insurers look at specific cost factors,” such as medical inflation and drug costs, said James Auden, Chicago-based director of underwriting at Fitch Ratings Inc.

Social inflation, said Mr. Miller, is much more difficult to measure, “but some recent significant increases from historical levels of settlements are a troubling pattern.” He added that “the recent pattern of fear of litigation by some policyholders has led not only to large settlements but relatively quick settlements compared to our history. So we also need to be aware of possible changes in settlement patterns.”

Mr Auden pointed to large verdicts and a greater number of claims being prosecuted as components of social inflation, something he said had been a problem “for some time” preceding recent spikes in general inflation.

Aspen has created an Inflation Working Group, including claims and actuarial staff, to help evaluate how effectively contingency reserves and specific occurred but not reported (IBNRs) include current levels of inflation and how much additional inflation is embedded in them.

“We work closely with underwriters to understand changes in limits and attachment profiles and with claims to stay close to their response to inflation and their view of the changing impact of the claims environment by industry,” Mr. Miller.

While there was some concern that lines such as commercial auto and professional liability could be under-reserved, strength in other areas such as workers’ compensation offset those potential weaknesses, leaving general industry reserves in “relatively good shape” at the end of 2021, Fitch’s said Mr. Auden.

Pricing in commercial lines in recent quarters has allowed some insurers and reinsurers to take a “more conservative bent” in establishing reserves, he added.

John Iten, a director in New York with S&P Global Ratings, said 2021’s favorable reserve trend increased to $14.5 billion, after sitting at $7 billion to $8 billion for several years, and there is no sign of reserve shortage.

Of the 22 statutory commercial lines that insurers report on, only seven had negative reserve growth in 2021, including commercial auto, which has been “problematic” for years, Mr. Iten. General liability lines also developed negatively in 2021.

It has been difficult for insurance companies to catch up with loss trends in auto lines, he said.

The market has responded with speed increases in lines such as commercial cars, Mr. Auden.

Longer lines could be more vulnerable if inflation were to continue beyond actuarial assumptions, Mr. Iten.

“It’s all about how far from expectations they are. If it (inflation) is within expectations, they’ve already booked for it.” Should those variables fluctuate, “the actuaries have to go back and change their assumptions,” he said.

Many companies build loss inflation of 5% to 6% into their actuarial assumptions, Mr. Iten.

In a recent report, “US Property/Casualty Insurance Loss Reserve Risk,” Fitch noted that “Prolonged high inflation over an extended period presents the potential for significant pricing errors and future reserve shortfalls.”


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