Insurance literature is replete with articles, analyses, studies and discussion documents related to industry loss and loss adjustment expense (L&LAE) reserves, the impact of L&LAE reserve adequacy on insurance pricing cycles as well as the correlation between inadequate L&LAE reserves and the failure rates of carriers. However, we found negligible justification for the terminology or analysis of “industry L&LAE reserves” and no rigorous discussion of the impact of underreserving L&LAE on the overstatement of reported income by solvent carriers.
In the first of a two-part series of articles, Petrelli reviews loss reserve concentrations. In part 2, he reviews the relationship between reserve development and financial strength ratings assigned by other rating agencies.
For the complete report, download the entire whitepaper, “A Discussion of P/C Loss and Loss Adjustment Expense Reserve Studies.”
In an effort to initiate thoughtful review and dialogue on these issues, Demotech undertook this study to investigate two questions:Is the term “industry loss and loss adjustment expense reserves” a meaningful one? Has the relationship between underreporting of L&LAE and the resulting overreporting of income been thoroughly discussed? If not, why not?
A review of some of the relevant literature is set forth in our full whitepaper, “A Discussion of P/C Loss and Loss Adjustment Expense Reserve Studies.” In this part of our two-part article, we delve into the first question, saving investigation of the second for Part 2, “Underreserving, Balance Sheet Fundamentals Taking a Back Seat in Rating Agency Analyses.”