A recent study has revealed interesting trends in how insurance companies in the United States are managing their reserves. The analysis, which looked at the top 20 insurers based on their reserve-to-paid-loss ratio, found that 45% of these companies are taking a cautious approach to setting aside money for future claims. In contrast, 30% are being more aggressive, while the remaining 25% are accurately assessing their needs.
This insight comes from a new tool that analyzes property and casualty loss development and reserves. It tracks how much money insurers are reserving compared to what they are actually paying out in claims. The tool uses visual aids like heat maps and detailed tables to help users understand how well insurers are aligning their reserves with their actual claims.
Over the past five years, only 25% of the top insurers have shown a well-calibrated approach to reserving, which is defined as having a reserve-to-paid-loss ratio between 0.9 and 1.5. This is an improvement from just 15% in the previous five-year period from 2018 to 2023. This shift appears to be influenced by changing regulations and accounting standards, such as IFRS 17, which discourage overly conservative reserving practices that might misrepresent a company’s financial health.
Additionally, advancements in technology, including data analytics and machine learning, are helping insurers access real-time claims data. This allows actuaries to set reserves more accurately, reducing the need for large safety buffers.
However, there is a concerning trend of under-reserving among many insurers. From 2020 to 2024, the reserve-to-paid-loss ratio for most companies has been declining. A ratio below 0.9 can indicate a lack of sufficient reserves, which might be a strategy to enhance short-term financial results or due to overly optimistic views on how claims will develop.
The analysis indicates that many insurers now have reserve-to-paid-loss ratios below 1.0, suggesting a growing tendency to under-reserve. This could pose risks to their financial stability and solvency if not addressed.
In conclusion, while improvements in data analysis and regulatory standards have led to more precise reserving practices, the insurance industry must remain cautious. A trend toward under-reserving could have serious implications for insurers and their ability to meet future claims. For those interested in a deeper look into loss development and reserve adequacy, a dedicated dashboard is available for further insights.