Insurers under fire from worried PRA over casualty reserving

The PRA is warning insurers they have ‘critical questions’ to answer over reserving and reserve releases after it found some potentially worrying problems. 

The regulator is particularly concerned about casaulty, and in one extreme example found an insurer whose booked reserves could be short by as much as 25%.

“Turning to reserve releases, our obvious concern is that these should reflect genuine reserve redundancy with the decisions taken by risk managers and actuaries using their best professional judgement and not in any way influenced by a desire to sustain reported profits,” David Rule, PRA executive director of insurance supervision told an audience in Dublin on Wednesday.

Rule told the General Insurance Research Organisation conference that some insurers were releasing reserves so aggressively that future claims inflation would have to be, by their calculations, ‘very low’.

“In an extreme case, we estimated past claims inflation for the class of business to be 5% per annum, whereas to obtain the particular insurer’s booked reserves would imply a future claims inflation assumption of -2%.

“If the future trend is in fact in line with past inflation, booked reserves would need to be 25% higher than currently assumed.

“Insurers that have sought to diversify and grow their business into longer-tail liability insurance classes have critical questions to answer about the future direction of claims inflation,” he said.

PRA roadmap for insurers 

Rule said the PRA expects insurers to follow its roadmap on four key poins.

Rule said he expects boards to be ‘relentlessly inquisitive’ on underwriting, and specifically on underwriting controls, pricing trends, exposure charges and rate adequacy.

On reserving, Rule said insurers must have a robust approach to reserve setting and adequate oversight. Importantly, boards must demonstrate ‘independent challenges’ on key reserving assumptions.

Thirdly, on reinsurance, he said it must be reflected in business plans, capital setting and reserving.

Finally, insures risk assessment and capital requirements must be fit for a challenging trading environment.