...A Primary Risk Factor: Loss reserves are the largest liability on property/casualty (P/C) insurer balance sheets. All insurers face to varying degrees the uncertainty of reserve deficiencies, which correspond with a potential overstatement of reported equity and prior- period earnings. Adequacy Revealed via Experience: Reserve analysis for a P/C insurer centers first around the adequacy of reported loss reserves within the most recent balance sheet, which can be estimated through analysis of paid and incurred historical loss experience reported in statutory filings. Over the long term, an insurer's reserving prowess and quality is shown through reported prior-period reserve development. Demonstration of consistent loss reserve adequacy or redundancies is viewed favorably in the rating process. Reserve Adequacy Is Cyclical: P/C insurers have benefited from nearly a decade of stable loss costs and favorable reserve development. However, historical reserve experience reveals periods of sharp...
