Moody’s: US P&C reserves redundant overall but ‘modest’ deficiency in long-tail lines

By Michael Loney

June 1 - (The Insurer) - U.S. property insurers are reporting higher favourable reserve development in personal lines but adverse development in commercial lines, according to Moody’s, which expects continued reserve increases for general liability and commercial auto liability in 2025.

In a report, Moody’s said that the U.S. P&C industry reported modest favorable reserve releases of $2.5 billion in 2024. This was up from $1.5 billion in 2023.

“At year-end 2024 we estimate that P&C industry reserves are slightly redundant. Over the past decade, P&C insurers’ earnings have benefited from favourable reserve development, but results have varied significantly by year and line of business,” the report said.

In 2024, favorable reserve development increased to $5.4 billion for personal auto and homeowners lines, up from $1.3 billion in 2023 as loss cost trends moderated.

“We believe that many personal auto insurers are including higher loss cost trends assumptions in their reserves, while loss cost trends are moderating. As a result, we expect personal auto insurers to report healthy reserve releases in 2025,“ the report said.

In commercial lines, adverse reserve development increased to $5.1 billion in 2024. This was up from $2.1 billion in 2023, which Moody’s said was primarily because of reserve strengthening for general and excess liability and commercial auto.

Financial and other lines reported favorable development of $2.2 billion in 2024 and 2023.

Favorable reserve development in 2024 from workers’ compensation and short-tail lines including auto physical damage totaled $14.7 billion, offsetting the $14.5 billion of adverse development from general liability and commercial auto liability.

Moody’s estimated a “modest reserve deficiency in long-tail commercial lines” and a “healthy cushion” in personal auto.

“Based on our reserve analysis using US P&C aggregate loss triangles from statutory filings, we estimate that reserves are in a reasonable range of adequacy for most insurance lines, with continued deficiencies for commercial general liability and commercial auto, partially offset by reserve redundancies for personal auto liability, auto physical damage and workers' compensation,” the report said.

“We expect that insurers will report favourable development for short-tail lines, personal auto, and workers' compensation, helping to offset continued adverse development for commercial auto and general liability,” it continued.

Moody’s believes workers' compensation reserves remain redundant, but warned that rising medical inflation is a risk.

The rating agency highlighted that the litigious environment is driving claims inflation in long-tail lines.

“Multiple factors are contributing to elevated social inflation, including negative attitudes toward businesses, increased propensity to sue and retain counsel, higher jury awards and settlements, the use of litigation financing as well as more attorney advertising,” the report said.

Insurers have responded by raising rates, changing terms and conditions, reducing exposure in certain jurisdictions, and improving claims management processes including through the use of AI.

The report also said that longstanding liabilities and emerging risks pose challenges.

“While insurers continue to add to asbestos and environmental reserves, emerging risks include PFAS (‘forever chemicals’) and microplastics. Insurers closely monitor emerging risks and may insert exclusions into policy language to help reduce their exposure,” the report said.