NAVG » Topics » Prior Year Reserve Redundancies/Deficiencies

These excerpts taken from the NAVG 10-K filed Feb 21, 2008.
Prior Year Reserve Redundancies/Deficiencies
As part of our regular review of prior reserves, the Company’s actuaries may determine, based on their judgment, that certain assumptions made in the reserving process in prior years may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, our actuaries may make corresponding reserve adjustments.
Prior year reserve redundancies of $47.0 million, $17.2 million and $3.8 million net of reinsurance were recorded in 2007, 2006 and 2005, respectively, as discussed below. The relevant factors that may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary by line of business and from period to period
To the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is recorded as a charge or credit to earnings in the period in which the deficiency or redundancy is identified.
Following is a discussion of relevant factors impacting our 2007 loss reserves:
The Insurance Companies recorded $10.7 million of net prior years’ savings for marine business comprised of $6.5 million of savings in the transport business, $3.7 million of savings in the marine liability business, $1.6 million of savings in the cargo business, $1.0 million of savings in each of the hull and offshore energy businesses; partially offset by $1.9 million of 2005 Hurricanes Katrina and Rita loss development and $1.6 million for uncollectible reinsurance recoverables for asbestos losses. The favorable development for the liability, cargo, hull and offshore energy coverages was primarily due to reduced claim activity for the 2005 and 2006 underwriting years. Prior to 2007, because the Company did not have sufficient experience in the transport product line, it instead used its hull and liability products loss development experience as a key assumption in setting the IBNR loss reserves for its transport product. Commencing in 2007, our actuaries determined that the Company’s loss development experience for its transport product had become sufficiently credible to begin establishing transport reserves using such experience, which resulted in the prior year savings referred to above recorded for this business.
The Insurance Companies recorded $12.1 million of net prior years’ savings for specialty business related to the contractors liability business for the years 1998 through 2006. The prior years’ savings recorded for contractors liability business was due mostly to continued favorable loss frequency and severity trends for 2003 to 2006 compared to expectations. Our actuaries believe that the favorable loss frequency trends result primarily from a number of underwriting and coverage changes since 2002, including the migration to non-admitted business from admitted business in 2003, which allowed the Company to exclude certain previously permitted exposures (for example, exposure to construction work performed prior to the policy inception), and withdrawals from certain contractor classes previously underwritten. Our actuaries believe that the favorable loss severity trends result primarily from improved claim practices coupled with a California legislative change, effective in mid-2002, which provides for an alternative dispute resolution system with respect to construction defect claims and is intended to avoid or mitigate costly litigation and claims settlements. While our actuaries were unable to precisely quantify the impact of each of the foregoing factors, such factors were judgmentally taken into account in recording such prior years’ savings for contractors liability business by evaluating actual loss development compared to expected loss development coupled with a frequency and severity claims analysis conducted in 2007.
The Insurance Companies have historically reserved for the professional liability business using ultimate loss ratios based on industry experience for this line of business given the Company’s limited claims history. Such industry experience is heavily influenced by the historical frequency and severity of large securities class action lawsuits. During 2007 the Insurance Companies reduced the net reserves for such claims-made policies compared to year-end 2006 by $10.4 million, mostly related to policies issued in 2004 and 2005. The reductions were made to recognize both the low level of open claim counts and the lack of claim

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severity compared to expectations at the time the reserves were initially established using industry experience.
In 2007, the Insurance Companies recorded approximately $0.6 million of net prior year savings from run-off business, principally resulting from a review of open claims files in the aviation business that was discontinued in 1999.
The Lloyd’s Operations recorded $13.2 million of net prior year savings, which included $3.4 million due to a review of the 2005 Hurricanes Katrina and Rita loss estimates, a release of approximately $2.0 million following a review of open claim files for the years 1998 to 2001, a $4.6 million reduction in our 2004 underwriting year estimates for the liability book due to favorable loss trends, and the remaining $3.2 million was mostly for offshore energy and liability business on business underwritten during 2002.
Following is a discussion of relevant factors impacting our 2006 loss reserves.
The Insurance Companies recorded $4.8 million of net prior years’ savings for marine business consisting of $7.9 million for business written in 2004 and 2005 mostly for favorable loss experience in cargo and marine liability business, partially offset by net prior years’ reserve deficiencies of $3.1 million for 2003 and prior years.
The Insurance Companies recorded $6.1 million of net prior years’ savings for specialty business of which $18.6 million was for favorable loss trends for construction liability business written in 2005 and 2004 offset by net prior years’ reserve deficiencies of $12.5 million principally for business written from 2003 to 2000 which was mostly for construction defect claims emergence in those years.
As discussed above, the Company establishes reserves for the professional liability business using ultimate loss ratios based on industry experience. During 2006 the Insurance Companies further reduced the net reserves for such claims made policies compared to year-end 2005, by $1.2 million mostly related to the 2004 year. The reductions were to recognize the low level of open claim counts and continued favorable development compared to expectations at the time the reserves were initially established.
The Lloyd’s Operations recorded $4.5 million of net prior years’ savings, which included $1.1 million related to a loss commutation for the 1999 to 2002 years, with the balance spread across several lines of business in the 2002 to 2004 years.
Following is a discussion of relevant factors impacting our 2005 loss reserves.
As discussed above, the Company establishes reserves for the professional liability business using ultimate loss ratios based on industry experience. During 2005, the Insurance Companies further reduced the reserves for such claims-made policies compared to year-end 2004, by approximately $3.0 million mostly all related to the 2003 and 2002 underwriting years. The reductions were to recognize the low level of claim counts and continued favorable development compared to expectations at the time the reserves were initially established.
The Insurance Companies recorded $1.6 million of net prior years’ savings from business assumed from the Lloyd’s Operations principally related to the 2003 underwriting year where loss reserves reductions were related to the reductions in premium estimates.
The Insurance Companies recorded $0.8 million of net prior years’ savings for run-off business principally due to favorable loss experience on aviation business discontinued in 1999.
The Insurance Companies recorded net prior years’ reserve deficiencies of $1.9 million for marine business principally due to an increase of approximately $4.5 million for unallocated loss adjustment expense reserves offset by net favorable loss experience of $2.6 million mostly related to the 2002 and prior underwriting years.
The Insurance Companies recorded net prior years’ reserve deficiencies of $0.9 million for specialty business due to a limited amount of adverse development for a line of business discontinued in 2005 and construction business offset by favorable development in specialty business written in the mid-west.
The Lloyd’s Operations recorded $1.2 million of net prior years’ savings mostly due to the favorable settlement of one large marine claim.
 
Prior Year
Reserve Redundancies/Deficiencies






As part of our regular review of prior reserves, the
Company’s actuaries may determine, based on their judgment,
that certain assumptions made in the reserving process in prior
years may need to be revised to reflect various factors, likely
including the availability of additional information. Based on
their reserve analyses, our actuaries may make corresponding
reserve adjustments.





Prior year reserve redundancies of $47.0 million,
$17.2 million and $3.8 million net of reinsurance were
recorded in 2007, 2006 and 2005, respectively, as discussed
below. The relevant factors that may have a significant impact
on the establishment and adjustment of loss and LAE reserves can
vary by line of business and from period to period





To the extent that reserves are deficient or redundant, the
amount of such deficiency or redundancy is recorded as a charge
or credit to earnings in the period in which the deficiency or
redundancy is identified.





Following is a discussion of relevant factors impacting our 2007
loss reserves:





The Insurance Companies recorded $10.7 million of net prior
years’ savings for marine business comprised of
$6.5 million of savings in the transport business,
$3.7 million of savings in the marine liability business,
$1.6 million of savings in the cargo business,
$1.0 million of savings in each of the hull and offshore
energy businesses; partially offset by $1.9 million of 2005
Hurricanes Katrina and Rita loss development and
$1.6 million for uncollectible reinsurance recoverables for
asbestos losses. The favorable development for the liability,
cargo, hull and offshore energy coverages was primarily due to
reduced claim activity for the 2005 and 2006 underwriting years.
Prior to 2007, because the Company did not have sufficient
experience in the transport product line, it instead used its
hull and liability products loss development experience as a key
assumption in setting the IBNR loss reserves for its transport
product. Commencing in 2007, our actuaries determined that the
Company’s loss development experience for its transport
product had become sufficiently credible to begin establishing
transport reserves using such experience, which resulted in the
prior year savings referred to above recorded for this business.





The Insurance Companies recorded $12.1 million of net prior
years’ savings for specialty business related to the
contractors liability business for the years 1998 through 2006.
The prior years’ savings recorded for contractors liability
business was due mostly to continued favorable loss frequency
and severity trends for 2003 to 2006 compared to expectations.
Our actuaries believe that the favorable loss frequency trends
result primarily from a number of underwriting and coverage
changes since 2002, including the migration to non-admitted
business from admitted business in 2003, which allowed the
Company to exclude certain previously permitted exposures (for
example, exposure to construction work performed prior to the
policy inception), and withdrawals from certain contractor
classes previously underwritten. Our actuaries believe that the
favorable loss severity trends result primarily from improved
claim practices coupled with a California legislative change,
effective in mid-2002, which provides for an alternative dispute
resolution system with respect to construction defect claims and
is intended to avoid or mitigate costly litigation and claims
settlements. While our actuaries were unable to precisely
quantify the impact of each of the foregoing factors, such
factors were judgmentally taken into account in recording such
prior years’ savings for contractors liability business by
evaluating actual loss development compared to expected loss
development coupled with a frequency and severity claims
analysis conducted in 2007.





The Insurance Companies have historically reserved for the
professional liability business using ultimate loss ratios based
on industry experience for this line of business given the
Company’s limited claims history. Such industry experience
is heavily influenced by the historical frequency and severity
of large securities class action lawsuits. During 2007 the
Insurance Companies reduced the net reserves for such
claims-made policies compared to year-end 2006 by
$10.4 million, mostly related to policies issued in 2004
and 2005. The reductions were made to recognize both the low
level of open claim counts and the lack of claim




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severity compared to expectations at the time the reserves were
initially established using industry experience.





In 2007, the Insurance Companies recorded approximately
$0.6 million of net prior year savings from run-off
business, principally resulting from a review of open claims
files in the aviation business that was discontinued in 1999.





The Lloyd’s Operations recorded $13.2 million of net
prior year savings, which included $3.4 million due to a
review of the 2005 Hurricanes Katrina and Rita loss estimates, a
release of approximately $2.0 million following a review of
open claim files for the years 1998 to 2001, a $4.6 million
reduction in our 2004 underwriting year estimates for the
liability book due to favorable loss trends, and the remaining
$3.2 million was mostly for offshore energy and liability
business on business underwritten during 2002.





Following is a discussion of relevant factors impacting our 2006
loss reserves.





The Insurance Companies recorded $4.8 million of net prior
years’ savings for marine business consisting of
$7.9 million for business written in 2004 and 2005 mostly
for favorable loss experience in cargo and marine liability
business, partially offset by net prior years’ reserve
deficiencies of $3.1 million for 2003 and prior years.





The Insurance Companies recorded $6.1 million of net prior
years’ savings for specialty business of which
$18.6 million was for favorable loss trends for
construction liability business written in 2005 and 2004 offset
by net prior years’ reserve deficiencies of
$12.5 million principally for business written from 2003 to
2000 which was mostly for construction defect claims emergence
in those years.





As discussed above, the Company establishes reserves for the
professional liability business using ultimate loss ratios based
on industry experience. During 2006 the Insurance Companies
further reduced the net reserves for such claims made policies
compared to year-end 2005, by $1.2 million mostly related
to the 2004 year. The reductions were to recognize the low
level of open claim counts and continued favorable development
compared to expectations at the time the reserves were initially
established.





The Lloyd’s Operations recorded $4.5 million of net
prior years’ savings, which included $1.1 million
related to a loss commutation for the 1999 to 2002 years,
with the balance spread across several lines of business in the
2002 to 2004 years.





Following is a discussion of relevant factors impacting our 2005
loss reserves.





As discussed above, the Company establishes reserves for the
professional liability business using ultimate loss ratios based
on industry experience. During 2005, the Insurance Companies
further reduced the reserves for such claims-made policies
compared to year-end 2004, by approximately $3.0 million
mostly all related to the 2003 and 2002 underwriting years. The
reductions were to recognize the low level of claim counts and
continued favorable development compared to expectations at the
time the reserves were initially established.





The Insurance Companies recorded $1.6 million of net prior
years’ savings from business assumed from the Lloyd’s
Operations principally related to the 2003 underwriting year
where loss reserves reductions were related to the reductions in
premium estimates.





The Insurance Companies recorded $0.8 million of net prior
years’ savings for run-off business principally due to
favorable loss experience on aviation business discontinued in
1999.





The Insurance Companies recorded net prior years’ reserve
deficiencies of $1.9 million for marine business
principally due to an increase of approximately
$4.5 million for unallocated loss adjustment expense
reserves offset by net favorable loss experience of
$2.6 million mostly related to the 2002 and prior
underwriting years.





The Insurance Companies recorded net prior years’ reserve
deficiencies of $0.9 million for specialty business due to
a limited amount of adverse development for a line of business
discontinued in 2005 and construction business offset by
favorable development in specialty business written in the
mid-west.





The Lloyd’s Operations recorded $1.2 million of net
prior years’ savings mostly due to the favorable settlement
of one large marine claim.


 




EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 21, 2008

RELATED TOPICS for NAVG:

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