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Midwest Actuarial Forum
March 23, 2004
P&C Reserve Analysis
Peter F. Patrino, CFA
Outline
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How does Fitch review reserves

The interaction of reserve quality & ratings
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Where does Fitch see reserve quality today

Some other Fitch views
P&C Reserve Analysis at Fitch
Internal
•
•
•
Retrospective Analysis
Claims Severity Analysis
Prospective Analysis – Schedule P Model
External
•
Actuarial Memorandum Reviews
Fitch’s View of Reserves

If ratings are point estimates of the credit position of an
entity, then property/casualty insurance ratings – relative to
other insurance and most non-insurance ratings – have a
wide standard deviation

WHY IS THIS THE CASE?  Uncertainty

WHAT IS THE CAUSE?  Reserves

Two Points:

when property/casualty insurers get into trouble, it is typically
due to a reserve shortfall

the reserve analysis is the most challenging part of analyzing
a property/casualty insurer
Fitch’s Industry Analysis for YE 2002
 US P&C Industry Reserve Deficiency

Overall – between $46 and $77 billion
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
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Non-Latent – between $32 and $38 billion

longer tail casualty lines

mainly accident years 1997-2002
Asbestos – between $9 and $29 billion

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16%-26% of reported surplus
policies written prior to early 1970s
Other Latent – between $5 and $10 billion
What Can Be Done….

More disclosure – starting to see some
—
Accident Year
—
Line of Business
—
Range

Quicker recognition of trends
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Eliminate discounting

Do whatever it takes to limit the variability in
reserve development
Variability In Development
Some Final Thoughts

Prospective “gut” feel analysis made by seasoned
professionals today is often better than detailed
analytical decisions made next week

Repeating the same exercise year-over-year is not
enough – go above and beyond, look for new ways
to do things better

Reaction is not good