Effects of Loss Reserve Margins on Calendar Year Results—Balcarek Expanded

Motivation. Reserve uncertainty is a significant risk to many insurance companies, captive insurers and self-insurance programs. Understanding and quantifying this risk is essential to insurance related enterprise risk management efforts. Using publicly available data, this paper examines reserve uncertainty for a majority of the U.S. property-casualty insurance industry on both an industry and by-company basis.

Method. The authors apply analyses similar to those used by Rafal Balcarek in his 1966 Proceedings of the Casualty Actuarial Society article entitled, “Effect of Loss Reserve Margins in Calendar Year Results.” The authors are able to greatly expand the amount of data reviewed and the methods of analysis greatly due to changes in publicly available data and computing power in the intervening years. Data organized in this manner may provide opportunities for understanding industry and company reserving behaviors and loss development risk potentials.

Results/Conclusions.
*For personal lines, industry loss development from initial reserve estimates has generally been favorable.
*The three main commercial lines, CMP, CAL, and WC all show significant cyclicality between years of material adverse development and material favorable development.
*Medical professional liability shows even stronger cyclical swings between a high of 26.0% adverse development on the 2001 calendar year loss ratio and a 31.9% favorable impact on calendar year 2010.
*Each of the lines reviewed have calendar year reserve adjustments that are positively correlated to the others. Particularly strong correlations were seen between:
-Homeowners (HMP/FMP) and personal auto liability (PPAL).
-Personal auto and commercial auto liability (CAL).
-The three predominant commercial lines, CMP, CAL and WC.
-Medical professional liability and the other three commercial lines.
-At a company level, the commercial lines, especially WC and MM have greater potential for significant calendar year loss ratios changes due to development from prior years.
*The commercial lines show cyclical behaviors in unexpected loss reserve development both at the industry composite and insurance company/group level.
*Calendar year loss ratios do not appear to be more stable than accident year results, but do appear to delay the recognition of underwriting losses and profits, particularly for commercial lines.
*For Personal lines, adverse development for the industry as a whole is realized by 36 months of maturity.
-For CMP and CAL, adverse development for the industry as a whole is generally under 1% at 72 months of maturity and beyond WC and MM both experience the widest fluctuations in AY loss reserves in more mature bservations.

Keywords: Loss Reserving, Risk Margins, Variability, Schedule P