Analyis & Commentary
Commentary and insights on the insurance industry can be found here.
Disclaimer: This information is not investment advice or actuarial advice. The comments below are based on publicly available data; consequently accuracy is not guaranteed by Archer Actuarial.
Analysis of Commercial Auto Liability – June, 2024
Let’s take a look a the historical accuracy of the carried ultimate loss ratios in the commercial auto line of business.
For this exercise, I used year-end 2023 Schedule P data for the 7 largest P&C groups. Each of the groups in this analysis had at least $1 billion of commercial auto earned premium in calendar year 2023.
I was a little surprised to discover that through 12/31/2023, the initial ultimate loss ratios developed upwards for every accident year between 2014 and 2022. Note that the “initial” ultimate loss ratios are selected using data evaluated 12 months after the beginning of the respective accident year.
Highlights:
- 6 of 10 accident years (2014 through 2019) developed upwards by 9 loss ratio points or more.
- 3 of 10 accident years (2020 through 2022) developed upwards slightly; however, these are the least mature years and have the largest potential for additional development.
- 1 accident year (2023) is still at it’s initial loss ratio selection, and has not had the opportunity to develop.
Some other interesting observations:
- The ratio of loss reserves (case reserves + IBNR) to paid loss at age 12 months has been increasing year over year (see the rightmost column of the attached exhibit).
- Hopefully, the higher ratio of reserves to paid losses will translate to lower prior year development in future calendar years. It is possible that the rate of claim payment has decreased over time; this could result an artificually high ratio.
- The initial loss & DCC ratio for accident year 2023 at 12 months is 77.4%. This is significantly higher than comparable initial loss ratios selections. Could this be reflect more conservative loss reserving or is indicative of deterioration in the performance of the portfolio?
I hope you found this presentation useful. What are your thoughts on the topic?
Analysis of Commercial Auto Liability Prior Year Development – July, 2024
Prior year development reflects changes in a P&C insurer’s estimate of ultimate loss for prior accident years. When this measure is positive, it means that an insurer revised its estimate of ultimate loss for prior accident years and recognizes that liabilities are higher than previously reflected. In other words, positive prior year development is “bad news”. Fortunately, it works the other way around too: favorable prior year development is “good news”.
The attached exhibit summarizes my analysis of 132 P&C groups using 2023 statutory annual statements for commercial auto liability. Any group with less than $10M of earned premium in calendar year 2023 was excluded from the analysis.
Collectively, $2.6B of adverse prior year development was recognized in calendar year 2023. This added 6.8 points to the insurers’ loss ratios in aggregate.
Not all insurers had adverse development, however. Out of the 132 groups, 44 showed favorable prior year development totalling $481M (or 6.2 loss ratio points).
The remaining 88 groups showed $3.0B of adverse development (or 10.1 loss ratio points).
It is interesting to note the distribution of prior year development (in terms of loss ratio points). About 57% of the groups experienced prior year development between -10% and +10% in calendar year 2023. This means the remaining 43% of groups experienced adverse development beyond +/- 10%. Those are not small ultimate revisions, especially considering the $10M earned premium threshold.
This is just the tip of the iceberg. I leverage industry data to support my clients’ strategic marketing and underwriting efforts. Be sure to drop me a line if you would like to explore how I can help your business.
Hindsight IBNR to Case Reserve Method – Example
In a recent press release, a major P&C insurer noted $166 million of adverse prior year reserve development in their general liability line of business. Let’s use this as opportunity for an actuarial retrospective analysis to discover if there were any signs of a potential reserve deficiency.
I looked at the company’s 12/31/2023 reserves for their Other Liability (Occurrence) line of business using their 2023 Schedule P, Part H’s. Were there warning signs that investors should have heeded? My short answer is “yes”; however, it is very easy to make such a statement with the benefit of hindsight. I’m not criticizing the company or their reserve position – from my experience, it is an excellent company. Nonetheless, it is important to use instances such as these as learning experiences.
The attached exhibit illustrates an example of the Hindsight IBNR to Case Reserve method. This method is not generally used to estimate IBNR directly, but it can be valuable to see how carried IBNR compares to amounts implied by historical IBNR to case reserve ratios.
In this simple analysis, ratios of hindsight IBNR to case reserves are calculated in triangle form. Hindsight IBNR is defined as the difference between the carried ultimates at the most recent evaluation and the incurred loss at the respective historical evaluation. Essentially, hindsight IBNR is the IBNR that the company “would have” carried if the analysis was performed at the most recent evaluation date (12/31/2023 in our example).
The ratio of hindsight IBNR to case reserves represents IBNR as a function of case reserves. In the attached exhibit, one can observe how much IBNR is indicated relative to case reserves at various points in time. Observe that the ratios along the 12/31/2023 diagonal (in blue) tend to be lower than recent historical ratios. This indicates a potential IBNR deficiency.
When using this type of analysis, caution is well advised. Changes in case reserve adequacy, mix of business, timing of losses, and many other factors can distort the metrics. Putting these caveats aside for the moment, this analysis points to the possibility of deficient IBNR as of 12/31/2023, especially in accident years 2022 and 2023. Do you agree?
Thanks for reading. I leverage industry data to support my clients’ strategic marketing and underwriting efforts. Be sure to drop me a line if you would like to explore how I can help your business.