The covid pandemic has distorted historical patterns used by actuaries as a heightened risk landscape increases challenges for reserve management, AM Best says. 

Economic fallout from the covid crisis has given rise to indications of worsening reserve risk as insurers report fourth-quarter and full-year financial results, according to the ratings agency. 

Escalated risk applies especially for long-tail lines, it says, describing reserve estimation as “both an art and a science”. 

“Theoretical reserving methods may involve complicated maths and risk modeling, but the process enables the actuary to arrive at a best estimate that will be used by management to arrive at a final number reported on a company’s balance sheet,” AM Best senior industry analyst Christopher Graham said. 

Covid led to radical changes in construction, travel, education, commerce and the work environment, with shifts also in regulations, the legal system and insurance.

“This distorted the historical patterns that actuaries depend on to make decisions about the future,” AM Best said. 

In addition, economic inflation soared, with the average rate rising to 5.6% between 2021 and last year, compared with 1.45% for 2015 to 2019. 

“Actuaries use inflation estimates as one of many factors to predict increases in severity and losses,” AM Best said. “Given the inflationary spikes, severity could be underestimated, leading actuaries to raise prior projections.” 

Other factors contributing to reserve risk pressures include a rise in punitive damages in class action lawsuits brought against large corporations, the growth in litigation financing firms, and lawsuits around chemicals such as per and polyfluoroalkyl substances and microplastics. 

Climate-related casualty litigation and mental health issues related to technology addiction also have the potential to create issues in general liability, product liability and clean-up costs, the ratings agency says.