Last week, we reviewed the industry’s annual statutory data releases to see how the P&C industry fared in 2024. After reviewing loss ratios for several important commercial and personal lines, we concluded that the industry wasn’t taking nearly the dosage of reserve medicine it needed.
This week, we’re zooming in on Schedule P reserving data to put firm numbers on the loss reserve movements that we saw last week. The numbers below solidify our overall thesis that the industry is essentially playing a game of chicken, as it balances reserve development between various lines and accident years.
Behind a strong headline of industry profitability, several moving parts point to shakier foundations.
Overall, the industry's favorable development improved to $2.6bn, which was higher than the $1.5bn recorded in 2023.
The pluses and minuses are shown below, with favorable development of $19.1bn more than offsetting the adverse development of $16.5bn.
Looking at it by line, we see that net development in other liability jumped adversely from $5bn in 2023 to $8.9bn in 2024. Workers’ compensation was there to save the day again with $6.3bn of releases versus $6.1bn in 2023.
Commercial auto adverse development of $3.6bn and favorable personal lines development of $5.4bn were the other main contributors.
More concerning than simply the adverse development of other liability is the apportionment of that development by AY. Approximately 37% of the reserve strengthening in other liability came from the ostensibly “hard market” AYs of 2020 to 2023. This is roughly equivalent to the amount coming from the soft market years of 2015 to 2019, with the remainder coming from prior years. One could, in theory, argue that the quality of the “hard market” years is better on limit management and potentially higher investment income return due to the shift in interest rates. However, the question of limit will only be answered as the book seasons.
The offsetting worker's comp releases were also centered on recent AYs, which is a sign of the industry trying to balance adverse with releases. Workers' comp release apportionment was 34% from AY 2020-2023, 40% from AY 2015-2019, and the rest from prior years.
With the loss cost inflation continuing to tick up from worsening social inflation trends, the industry will continue to play this balancing act until the workers' comp releases run out. The upside is that the continued pressure on long-tailed casualty classes will push businesses into the surplus lines market unless primary casualty rates are raised.
This might result in a gradation by carriers, and their reported results will likely show that E&S-dominant carriers are best placed to continue to benefit from the pressure on the most exposed classes.
We caution that although surplus lines combined ratios have run ten points or better in recent years, the industry has faced a period when even this segment underperformed the primary insurers. So, it might be premature to declare victory for the quality of this book.
We discuss these points in detail below.
For the industry, personal lines releases from recent years offset the development from prior years
The chart below shows the net of pluses and minuses by different AYs, resulting in an overall $2.6bn reserve release for 2024. This was higher than the $1.5bn of reserve releases seen in 2023.
The most significant visible contributor is 2023, with a reserve release amount of $7.5bn, which includes material personal lines development and workers' compensation releases. Note that personal lines are generally short-tailed, so these releases are unlikely to continue as we anticipate competition picking up in the segment.
When we look at older AYs, we see negative reserve additions coming from long-tailed lines such as other liability.
On the commercial lines side, other liability and commercial auto adverse development worsened
The recently concluded Q4 2024 earnings season and the associated conference calls continue to illustrate the interplay between these lines. Public earnings releases often contain the net of several lines of business, making it difficult to drill down to how the individual lines and years are performing. However, our analysis of Schedule P data allows us to isolate each individual line to discern their full impact.
Statutory data illustrates below that other liability adverse development jumped to 9 pts on the loss ratio in 2024 versus 5.3 pts in 2023 in that segment. Although workers’ comp releases have been the “saving grace” for other liability reserve charges, they only moved up modestly to 13.7 pts from 12 pts in that segment.
Another line that has generated additional discussion is commercial auto and the worsening loss cost environment there. It has continued to worsen in 2024, with adverse development rising to 8.3 pts on the loss ratio from 7.5 pts in 2023. Our note last week showed that reported combined ratios had improved, which implies that the underlying loss ratio has gone down and could turn out to be a problem if 2024 develops adversely down the road.
With workers’ comp releases likely peaking, pricing in negative territory indicates a lower reserve bucket in the future.
The implication is that the industry cannot continue to benefit from releases to the same extent. Unless pricing accelerates materially in liability lines, this adverse development could be a longer-term problem. With the benefit of workers' compensation releases dwindling, the industry will find it challenging to mask the adverse development in other liability.
“Hard market” reserves are not looking that great
The three waterfall charts below show reserve development by AYs for the top commercial lines subsegments. There has been much industry debate on which years should be considered “hard market” or “soft market.” For the purposes of this piece, we’re considering 2015-2019 to be the soft market and 2020 onwards to be the hard market.
For other liability, as discussed earlier, the overall development was $8.9bn in 2024. Slicing this further, the “soft market” AYs contributed $3.3bn out of this, while the "hard market” contributed $3.2bn. Note the uptick in reserve addition for 2021 to 2023, which reflects the industry revisiting loss picks soon enough, a phenomenon that doesn’t happen that often for a long-tail line.
{Tables containing reserve development for leading companies at the top 10 groups for each line are shown in the appendix}
This adverse development has been materially offset by releases from workers' comp, which were modestly up in 2024 to $6.3bn versus $6.1bn in 2023, as shown below. However, recent AYs contributed a large number of releases, with 2020 to 2023 contributing 35%.
Workers' compensation has historically benefited from lower loss cost inflation and a strong economy. However, as we discussed in our outlook, many of these factors might be ending.
On the other hand, commercial auto has also continued to worsen, as shown below, developing adversely by $3.7bn. More than half of this development was centered in the past three years, with nearly 19% of the development coming from AY 2023 itself.
In summary, the industry’s balancing act continues, with adverse development in one line being offset by releases from other lines. However, workers' comp releases will start running out, and with commercial auto trends worsening, we would not be surprised to see the industry return to an overall adverse development position for 2025.
Appendix
