U.S. insurers' reserve redundancy estimated to be USD11.7 billion at YE2011 according to Aon Benfield study

CHICAGO, June 6, 2012 /PRNewswire/ -- Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc (NYSE:AON), has updated its U.S. insurance industry reserve adequacy study with year-end 2011 data.  

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The study, compiled by Aon Benfield Analytics, reveals that at YE2011 insurers' reserves were redundant by USD11.7 billion – or 2% of total booked reserves – compared with USD22.0 billion at YE2010, after the industry released USD12.7 billion of reserves during 2011.

The YE2011 figure is comprised of redundancies in personal lines of USD7.6 billion (YE2010: USD6.5 billion); commercial property of USD1.0 billion (YE2010: USD1.5 billion); and commercial liability of USD6.7 billion (YE2010: USD9.9 billion), offset by deficiencies in workers' compensation of USD1.7 billion (YE2010: USD6.5 billion redundant), and financial guaranty of USD1.8 billion (YE2010: USD2.4 billion).  The effects of the U.S. economic downturn and less favorable trends in loss frequency and severity have resulted in a significant shift in the level of reserve adequacy for workers' compensation compared to the YE2010 study. Workers' compensation has developed adversely by USD2.1 billion since 2009.

Aon Benfield Analytics estimates that USD7-10 billion of favorable reserve development will occur in 2012, and that the reserve redundancy will be eliminated in 1.1 years at the current run-rate.

The reserve redundancy in the two most recent accident years has decreased from USD11 billion to USD3 billion, reflecting continued market pricing pressures. At YE2011, accident years 2010 and 2011 accounted for 45% of the total industry booked reserves.

Stephen Mildenhall, Chief Executive Officer of Aon Benfield Analytics, said: "The headwind against a broad market hardening from reserve releases continued in Q1 2012, as public companies released an additional USD4.2 billion of reserves, compared to USD4.6 billion in 2011. However, the forecast is for the winds to abate over the next four to six quarters, with the hard market years slowing and the more recent accident years booked less conservatively."

The reserve adequacy study is based on early aggregations of insurers' statutory reports, and is subject to change as more combined reports are filed with the data aggregating service, SNL. The estimates are subject to considerable uncertainty and actual reserve emergence could vary materially from the amounts detailed. It is not an actuarial reserve opinion.

A full version of the study is available at the following link:
http://thoughtleadership.aonbenfield.com/Documents/20120606_ab_analytics_industry_reserves_report.pdf

Notes to editors – U.S. Reserve Estimated Adequacy (USD billion)

• The study is based on an analysis of U.S. statutory Schedule P triangles. It builds up the total industry position from a by-line analysis.
• The favorable emergence of USD12.7 billion of reserves during 2011 was at the 29th percentile of the estimated range of outcomes. The range is based on a Monte Carlo simulation for accident years 2010 and prior, calibrated to the December 31, 2010 statements. The 80th percentile range for 2011 emergence was from USD24 billion favorable to USD13 billion adverse emergence, so the actual favorable development in 2011 was not an unforeseeable or unexpected outcome. The 80th percentile range for 2012 shifted adversely, at USD21 billion favorable to USD15 billion adverse, highlighting an increased downside reserve risk for the industry.
• The study uses actuarial reserving procedures including the chain ladder method applied to paid and case incurred loss development triangles. In addition, the adequacy of all prior year reserves is estimated using a decaying average payment methodology. The study provides directional evidence about the aggregate adequacy of industry reserves and tries to capture effects that may not be apparent or credible in any individual company's data.
• This analysis is based on nominal losses as reported in Schedule P, and does not include tabular and/or non-tabular discounts as a reduction in reserve adequacy for workers' compensation. Other industry studies completed on workers' compensation may include these discounts.  

About Aon Benfield

Aon Benfield, a division of Aon plc (NYSE: AON), is the world's leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world's markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals' expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.

About Aon

Aon plc (NYSE: AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human resources solutions and outsourcing. Through its more than 60,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon's industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the world's best broker by Euromoney magazine's 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance's listing of the world's insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by the readers of Business Insurance. Visit http://www.aon.com for more information on Aon and  http://www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

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