Weak reserves may turn market

It is commonly believed that only a major nat cat event can end a soft market. In fact, it may be a need to significantly strengthen reserves that will deliver this outcome, Charles Manchester, CEO of Manchester Underwriting Management, told Monte Carlo Today.

“While you can say that you need a catastrophe of biblical proportions to turn the market, the casualty space has been under-reserving for over a decade, and that may itself prove to be such a catastrophe,” Manchester said.

He said that when claims start to emerge on long-tail business on which reserves have been released, and it becomes clear they need strengthening again, the market will react.

“With casualty you can write the business but it can take a number of years before you feel the pain,” Manchester said.

American International Group (AIG) discovered a major reserve gap in its casualty business after a review in 2016. Its fourth quarter 2016 results were impacted by a $5.6 billion prior year adverse reserve development, driven by the US casualty operations.

Manchester believes that elsewhere in the market the need for reserve strengthening may surprise capital providers, who will find out too late that the business has been loss-making.

“We are going to see reserve strengthening in the casualty space,” Manchester said. He claimed that many insurers have been releasing reserves prematurely to boost ailing results.

“Since the dawn of time, throughout soft markets managements have persuaded actuaries that they manage the market cycle; that they are being clever underwriters.

“Therefore, they deliver the same underwriting results that they did when rates were 50 percent higher.

“But since the dawn of time they have been proved wrong, and we’ve been in a soft market for many years now,” he said.

Manchester believes that reserve strengthening in the property/casualty space will result in higher rates. “Why would capital stay in the market when it realises that it is underwriting losses?” he concluded.