Market Outlook

Report: Conservative Reserving Practices Imperative

By: | January 27, 2014

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]

Workers’ comp insurers that maintain underwriting discipline, adequate pricing, and conservative reserving practices will be better positioned for success in the face of more favorable market conditions, says a new report. A.M. Best says while the system’s prospects seem to be brightening, reserves deteriorated for the fifth straight year in 2012.

The special report, Segment Review, says premiums grew for the second straight year in 2012, the combined ratio improved, and claims frequency declined at a faster rate than severity increased. However, it also notes the continuing growth of the industry’s loss-reserve deficiency.

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“A.M. Best believes the industry already has recognized most of the benefit of the workers’ comp reserve redundancy from older accident years, and that reserves for the more recent accident years ultimately will prove insufficient on an industrywide basis (although insurers with more conservative reserving practices may continue to produce redundancies),” the report says. “As a result, decreasing recognition of favorable loss reserve development will absorb much of the benefit to the loss ratio that would result from improved trends in rates and exposure.”

Best estimates that the loss and loss-adjustment expense reserve position was deficient by $27.8 billion, up from $26.7 billion in 2011. While statutory discounting is blamed for the majority of the deficiency, the adequacy of the reserves “remain uncertain for accident years when rates were at their low point,” the authors noted.

Liberty Mutual Insurance Companies was ranked the top carrier for 2012 followed by Travelers Group and Hartford Insurance Group.

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The R&I Editorial Team can be reached at [email protected]