Reserve Strengthening for Casualty Lines Not Over: Moody’s

If personal auto insurance loss reserves are developing adversely, can commercial general liability be far behind?

That’s the gist of one of the questions that analysts from Moody’s Investors Service asked—and answered—in a new report on the U.S. property/casualty insurance sector this week, predicting reserve strengthening lies ahead for commercial casualty lines for accident years 2022 and 2023.

Already last year, several insurers and reinsurers, including AXIS Capital, Markel Corp., Everest Group and Swiss Re, boosted loss reserves in commercial casualty lines for accident years 2016-2019.

Related articles: What Industry Executives Are Saying About Loss Reserves, Social Inflation; Worst Is Over: Most of Casualty Reserve Hole May Be Filled, Analyst Says

Attempting to forecast whether there will be more reserve charges for later accident years taken in calendar years 2024 and beyond in lines like commercial general liability and commercial auto, the Moody’s analysts look to a shorter-tail line—personal auto—for some indications.

“Calendar year adverse development for personal auto has traditionally been a strong predictor of accident year adverse development for commercial lines,” they observe in the report titled “Social inflation will drive higher losses.”

“Social inflation tends to hit personal auto first since claims tend to be more numerous, smaller and settle more quickly,” the report continues. The same factors that cause personal auto claims to increase tend to take longer to play out in longer-tail [commercial] lines.”

“We expect social inflation to continue, and insurers to respond by building higher expected loses into their policies, raising prices and boosting reserves,” said Jasper Cooper, vice president and senior credit officer at Moody’s Ratings, in a media statement about the report.

The report includes a graph comparing calendar year development in personal auto for each year in the period 2011-2023 with accident year development for the general liability line for the same years.

Favorable calendar year development of roughly $2 billion per year in 2011 and 2012, started decreasing around 2013. By calendar year 2015, there was a small amount of adverse development for personal auto—and it was up to roughly $2 billion adverse during calendar year 2016.

The switch in calendar year 2015 for personal auto was telling, according to the report, which notes that this was a precursor to subsequent adverse development in general liability in the 2015 accident year. Alongside a bar representing the slight amount of adverse development for calendar year 2015 in personal auto, the graph shows a bar indicating some $2 billion of adverse development for the commercial general liability line recorded as of year-end 2023. That adverse development was not recognized until years later, the report says.

The chart shows bars indicating greater amounts of adverse development for general liability for each of the accident years 2016-2019 (recorded through year-end 2023). Alongside those bars recording amounts in the $2-$3 billion ranger for each accident year, the Moody’s report shows that personal auto started to improve.

Personal auto insurers were able to observe rising claim costs first, and to react quickly to hike prices and tighten underwriting standards. They returned to favorable development by the 2018 calendar year, while general liability insurers continued to experience adverse development through the 2019 accident year.

The situation changed again for personal auto in 2022.

The largest bar on the graph indicates roughly $5 billion of adverse development during calendar year 2022 for personal auto, followed by less than $1 billion in calendar year 2023.

“We view the personal auto adverse development in 2022-23 as a likely predictor that the commercial casualty lines (particularly general liability and commercial auto) will experience adverse development for these accident years,” the report concludes.

Other takeaways in the report:

• Across all lines of business, reserve releases for the U.S. P/C insurance industry declined to $2.3 billion in calendar years 2023 from $4.5 billion in 2022 and $5.9 billion in 2021.
• General liability losses have more than doubled over the last 10 years, as have commercial auto liability losses. Workers compensation losses, in contrast, have been relatively flat over the same 10-year period 2014-2023.
• During calendar year 2023, favorable reserve development from workers compensation and short-tail lines totaled $12.5 billion, more than offsetting $10 billion of adverse development from general liability, commercial and personal auto.
• Excluding workers comp and short-tailed lines like auto physical damage and commercial property, industry reserve development would have been adverse for both calendar years 2022 and 2023.
• Moody’s estimates a modest deficiency in long-tail casualty lines as of year-end 2023. Although the estimate dollar amount of the deficiency is not provided in the report, a graph in the report indicates that for general liability, the deficiency is more than 4 percent of carried reserves. For commercial auto liability, it’s roughly 3 percent of carried reserves, and about 2 percent for commercial multiple peril.