The property and casualty insurance industry had more than $19 billion of reserve redundancy at the end of 2009—a majority of which will be released this year and the next, according to Morgan Stanley.
A recent report on the p&c market from Morgan Stanley Investment Research said most of these reserves are in the workers’ compensation, medical malpractice and personal auto liability lines, and could be a source of future earnings as they are released.
Morgan Stanley also said the current p&c soft market will not turn hard until the industry feels a reserve deficiency, negative operating profits and adverse development. Morgan Stanley predicted that this will likely not happen until 2013.
An industry-wide drop to negative operating profits “requires profitability to shrink by $50 billion from underwriting losses,” such as from a natural or man-made catastrophe, social inflation, unforeseen product losses or a combination of these factors.
Morgan Stanley analysts see pricing down about 1 percent in 2010 and 2011—a 4 percent decrease in commercial lines and a 3 percent increase in personal lines.
Right now the industry has plenty of capital, reserve redundancy and operating profits, Morgan Stanley said.
The outlook for investors puts p&c excess capital at more than $100 billion, using a metric of premiums to surplus ratio. The amount is at an all-time high, Morgan Stanley said.
