1. Industry Loss Reserve Adequacy A.M. Best’s Perspective
2001 Casualty Loss Reserve Seminar
Industry Loss Reserve Adequacy A.M. Best’s Perspective
Robert E. Farnam
Senior Financial Analyst and Actuary
A.M. Best Company

2. Outline A.M. Best Data A.M. Best Loss Reserve Model
Current State of Industry Reserves
Industry Reserve Adequacy
In Total
By Line of Business
Core/A&E
Conclusions/Expectations

3. A.M. Best Data 2442 Companies + 13 State Funds
AZ, CA, ID, LA, MD, ME, MN, OR, PA, RI, TX, UT, WI
Industry Consolidated Schedule P
Supplemental Rating Questionnaire
Internal/External Actuarial Reports
Discussions With Management

4. A.M. Best Loss Reserve Model
Six Separate Methods
Two Company-Specific Paid Loss Development
Two Company-Specific Case Incurred Loss Development
Industry Paid Loss Development
Industry Case Incurred Loss Development
If Volatile, Default to Fixed Loss Ratio Method
Weight Based on Company Credibility
Company Credibility Between 40% and 100%
Use Coefficient of Variation for the LDFs

5. State of Industry Reserves
Total Carried Reserves = $369.5 Billion
Core Reserves = $347.1 Billion
A&E Reserves = $22.4 Billion
Reserves to Earned Premium Declining
Adverse Development in Recent AY’s
Higher Initial Loss Pick in Recent AY’s
Prior Year Redundancies Are Gone
Many Company Reserve Strengthenings

6. State of Industry Reserves

7. State of Industry Reserves

8. State of Industry Reserves

9. State of Industry Reserves

10. State of Industry Reserves

11. Industry Reserve Adequacy
Core Reserves Deficient by $41.6 Billion
11% of Total Reserves, 13% of Surplus
Statutory Discount = $14.2 Billion
“Discounted” Deficiency = $27.4 Billion
Predominantly Commercial Lines
A&E Reserves Deficient by $57.5 Billion
16% of Total Reserves, 18% of Surplus
“Pay-As-You-Go” Funding
Industry Survival Ratio = 12x

12. Industry Reserve Adequacy
Increased A&E Costs
Acceleration of Asbestos Defendant Bankruptcies
Spread of Litigation to Peripheral Defendants
Reopened Claims Due to Reclassification
Expected Maturation of More Serious Asbestos-Linked Illnesses
Increased Number of Plaintiff’s Attorneys
Erosion of Traditional Policy Defenses
Rush to File Claims Before Federal Tort Reform?

13. Industry Reserve Adequacy

14. Industry Reserve Adequacy

15. Industry Reserve Adequacy

16. Conclusions/Expectations
Still Long Way To Go for Favorable Economic Returns
More Reserve Surprises, Especially Among Commercial Lines Writers
Price Firming Through 2002, Partially Offset by Rising Claim Costs
Weak Operating Performances Continue
Downward Rating Actions Continue