Insurers' Reserve Strength Offsets Near-Term Inflation Concerns
May 05, 2022
US property-casualty insurers' loss reserves mitigate near-term inflation concerns, though prolonged inflation could significantly increase the risks of significant pricing errors and reserve deficiencies, according to Fitch Ratings.
In a new special report, "U.S. Property/Casualty Insurance Loss Reserve Risk (Balance Sheet Strength, Favorable Market Conditions Allay Near-Term Inflation Concerns," the rating agency said the US property-casualty industry's statutory loss reserves remained adequate at the end of 2021. A 16-year track record of favorable prior-period development supported balance sheet strength, Fitch said.
"The ongoing positive pricing environment and potential for further redundancies from declining claims frequency in accident year 2020 offset near-term concerns from recent rising inflation," Fitch said.
Fitch noted that property-casualty insurers experienced sizable reserve deficiencies in the mid-1980s and late 1990s/early 2000s as a result of high inflation, larger liability losses, and extreme depressed market cycles. "However, improved operating practices and information systems boost insurers' capabilities to recognize and react to changes in incurred loss experience," Fitch said.
The negative impacts of inflation in 2021 were most apparent in property and auto insurance lines due to increasing loss ratios resulting from supply chain issues and tight labor markets, Fitch said. The rating agency added that persistent high inflation can create reserve risk in longer-tail casualty and liability lines, making it more difficult for insurers to identify changes in loss development trends.
More conservative capital management by the US property-casualty insurance industry has led to a long-term reduction in industry reserve leverage over time, Fitch said, which reduces the effect of reserve deficiencies on insurers' capital levels.
May 05, 2022