fIGure 5 Statement-Year Development Through Dec. 31, 2010
or other sources of medical cost escalation. The result is adverse development,
which may occur incrementally each year
(known as “stair stepping”) or may occur
for a particular company in lump sums
at multiyear intervals as case reserves
that were set five to 10 years earlier are
recognized en masse as insufficient for
current (let alone future) cost levels. The
actuarial development of incurred but not
reported (IBNR) reserves in such cases is
complicated by the limited history of development available for older workers’
Other sources of adverse development
are numerous. Construction defect claims
are an example of another latent exposure
facing the insurance industry. Aggressive
reserves carried by some companies, typically toward the end of a soft market, also
will contribute to subsequent adverse development for the industry.
One interesting facet of Figure 3
is how similar the most recent statement years look to the late 1990s, when
the last turn to a soft market occurred.
Development for the 2006–2009 statement years to date appears quite similar
to development for 1995–1998 through
year-end 1999. History alone suggests
that subsequent adverse development
for these more recent statement years is
a real possibility.
That said, one reasonably might ask
from where the latent liabilities will
stem. The industry certainly continues
to experience adverse development in
older years within workers’ compensation and asbestos claims as well as areas
such as construction defect. Other areas
currently are not expected to produce
sizable liabilities for the industry, but
have the potential to be underestimated significantly. Claims stemming from
climate change and Chinese drywall are
two examples of areas that could develop adversely—and unexpectedly—for the
industry in the future.
Source: Milliman analysis of National Underwriter Insurance Data Services from Highline Data
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
What Does the future hold?
While future development for the industry is uncertain, consider that A.M. Best
estimates that reserves for the property
and casualty industry are deficient by $43
billion as of year-end 2010. Approximately
half this deficiency is estimated as stemming from workers’ compensation, with
an additional $10 billion from asbestos
claims and the rest from remaining segments. If this estimate is correct, it would
be more than sufficient to offset the favorable development experienced to date in
the most recent statement years.
The possibility of an ongoing reserve
deficiency for the industry represents a
twofold challenge for actuaries. The first
is to recognize the potential for latent
exposure within the books of business
for which reserves are reviewed and to
include reasonable provisions in analyses for this. The second is a challenge of
communication. The potential for latent
exposure must be explained to company
management in a way that demonstrates
the consistency of the indicated provision with historical experience for given
reserve segments—either for the company itself or for the industry as a whole.
Perhaps then we will be able to close the
gap between perceived and ultimate liabilities.
SUSAN J. FORRAY, a fellow of the
Casualty Actuarial Society and a member
of the Academy, is a principal and
consulting actuary with the Milwaukee
office of Milliman, with expertise
in property and casualty insurance,
particularly rate-making, loss reserving,
and financial planning. She has advised a
wide spectrum of risk-bearing entities in
both the public and private sectors, from
large, multinational insurance companies
to self-insured programs. She can be
reached at email@example.com.
This article is solely the opinion of its author.
It does not express the official policy of the
American Academy of Actuaries; nor does it
necessarily reflect the opinions of the Academy’s
individual officers, members, or staff.
A.M. Best Company’s Special Report: U.S.
Property/Casualty Review & Preview, Feb. 14,
A.M. Best Company’s Special Report: U.S.
Asbestos & Environmental Liabilities, Feb. 21,