Elevated risk environment prompts challenges for reserve management

Aggressive inflation has complicated loss predictions and could underestimate severity.

AM Best noted worsening reserve risk amongst insurers as they navigate the economic aftermath of the COVID-19 era. Escalating reserve risk, especially for long-tail insurance lines, poses challenges for insurers, with even minor deficiencies impacting financial stability. 

Estimating reserves is a blend of mathematical modelling and risk assessment, crucial for projecting future financial needs.

The pandemic-induced economic disruptions, spanning construction, travel, education, and commerce, along with regulatory changes, have disrupted historical data patterns used by actuaries. 

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Economic inflation has surged, averaging 5.6% from 2021 to 2023, complicating loss predictions and potentially underestimating severity.

Various factors contribute to reserve risk pressures, including:

• Increased punitive damages in class action lawsuits against corporations, complicating loss estimates.
• Growth in litigation financing firms using technology, causing payment pattern distortions.
• Legal issues surrounding chemicals like PFAS and microplastics, climate-related casualty litigation, and mental health concerns related to technology addiction, impact general liability, product liability, and clean-up costs.