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'Excessive' and 'inadequate' reserving opinions remain rare in P&C industry


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'Excessive' and 'inadequate' reserving opinions remain rare in P&C industry

Actuaries for the vast majority of U.S. property and casualty insurers concluded that companies' carried reserves at year-end 2018 made reasonable provisions for their obligations, but a review of annual statement data reveals a handful of exceptions to that rule.

Among the 2,364 nonwithdrawn statements of actuarial opinion for calendar year 2018, according to electronic disclosures received as of March 25, there were 2,348 instances in which companies were found to have made reasonable provisions for their unpaid losses and loss adjustment expenses. Of the remaining 16 statements, actuaries issued findings of excessive reserves for four companies, inadequate reserves for three companies and "no opinion" for six companies. The remaining three received qualified opinions.

Those results were generally consistent with 2017, when 99.3% of the 2,443 entities for which actuarial opinions had been issued were deemed to have made reasonable provisions.

All three of the insurers alleged to have inadequate reserve positions at the end of 2018 are New York-domiciled entities that received the same opinions a year prior. In one instance, however, there seemed to be less ambiguity over the supposed deficiency.

Demotech Inc.'s Joseph Petrelli, in his statement of actuarial opinion for Fulmont Mutual Insurance Co., said he believed the gross and net loss and LAE reserves carried by the company, a small, upstate New York-focused property insurer, are "inadequate." He said they did not meet the requirements of New York insurance laws and were inconsistent with a finding that the company provided a reasonable provision for losses. Fulmont Mutual's reserves were $277,000 below Petrelli's point estimate and $159,000 short of the low end of his range on a net basis.

In his 2017 statement of actuarial opinion, Petrelli said Fulmont Mutual's reserves were "marginally lower" than the low end of his calculated range. As such, he added, they "may not" be consistent with a finding of a reasonable provision. Petrelli concluded that his opinion would more likely be considered one of "inadequacy" as opposed to no opinion.

Fulmont Mutual in the notes to its 2017 audited financial statements said management believed its provisions for losses and LAE to be adequate to cover ultimate liabilities.

The text of actuarial opinions pertaining to the two other companies shown in the electronic data to have received designations of reserve inadequacy in 2018, Maya Assurance Co. and American Transit Insurance Co., was not available as of this article's time of publication. The actuaries listed for those respective entities were Benjamin Newville and Tiller Consulting Group Inc.'s Margaret Tiller Sherwood.

At the other end of the spectrum, actuaries opined that J.M. Woodworth Risk Retention Group Inc. — as well as the Stratford Insurance Co., Western World Insurance Co. and Tudor Insurance Co. subsidiaries of American International Group Inc. — had excessive reserve positions at year-end 2018. AIG gained ownership of those three companies, which are party to an intercompany pooling arrangement, as part of its July 2018 acquisition of Validus Holdings Ltd.

Milliman Inc.'s Derek Jones said his evaluation focused on the pool's reserves on a combined basis. He concluded that the provision for net unpaid losses and LAE was $8.8 million above the high end of his range of reasonable estimates, a finding that he attributed primarily to redundancies in the multiperil crop insurance business.

What is or is not reasonable can be open to interpretation. The ongoing dispute over the fate of Park Insurance Co., a New York-based taxi and limousine insurer, may represent the most prominent case in point at the moment.

Chief Actuary Susan Schoenberger concluded for a third consecutive year that Park's loss and LAE reserves made a reasonable provision for its obligations. The company's previous third-party actuary, Steven Lattanzio of Actuarial & Technical Solutions Inc. said the reserves were deficient by nearly $5.4 million at year-end 2015. The New York State Department of Financial Services, which first moved to place Park into liquidation in October 2017, alleged that the company "routinely terminated" actuaries and accountants "when they would not succumb to pressure ... to suppress the calculation of the reserves required to satisfy the company's obligations."

But as the overwhelming findings of reasonableness in the 2018 data suggests, such a dramatic divergence of opinions remains highly unusual.