Workers Compensation Brokers Face Benefits and Challenges as Reserves Decline

Property/casualty insurer reserves declining: Analysis

Business Insurance

June 22, 2012

The U.S. property/casualty insurance industry's reserves are slightly deficient, investment bank Keefe, Bruyette & Woods Inc. said in a report issued Friday.

According to firm's “2012 Annual P&C Industry Reserve Review,” the positive reserve development the sector has seen in recent years will not continue.

“We estimate the P&C industry's loss reserves for accident years 2002 to 2011 are $3.0 billion (or 0.5%) deficient as of year-end 2011,” the report said. “We continue to believe most P&C insurers will see a drop-off in the earnings benefit they receive from favorable development.”

The report said that while reserves for accident years 2002 to 2007 remain redundant, accident years 2008 to 2011 are under-reserved, and New York-based KBW said it expects to see adverse development related to those accident years in the future. These adverse developments will be apparent on industry balance sheets, the report concludes.

Reserve charges expected

“We believe most P&C insurers will see a drop-off in the earnings benefit they receive from favorable development going forward, and we expect many companies will take reserve charges in the next couple of years,” according to the report.

Moreover, the report finds that reserve adequacy varies by line of business.

“Our analysis indicates the industry's reserves are redundant in private passenger auto liability, medical malpractice, and other liability lines, while reserves are deficient in the workers compensation, commercial multiple peril, products liability, and liability reinsurance lines,” said the report.

It's obvious from this article that insurance companies are lacking sufficient funds in reserves to pay for workers comp claims. This is another reason, on top of multiple other reasons, why we are going to see a major increase in workers comp premiums. On the one hand, this will obviously make it even more difficult for brokers to renew their accounts. On the other hand, brokers can offer their clients workers compensation audit reviews and they will get their clients cash back returns and keep them for life.