The US general insurance industry had an estimated reserve deficiency of between $63 billion and $106 billion at the end of last year, according to Fitch Ratings. It says such figures are equal to 10-17% of total reserves and 16-26% of reported surplus.

Fitch director James Auden says the deficiencies lead to “material over-statements” in statutory capital. “The recognition of deficiencies over time will create a substantial drag on future earnings for the industry, similar to what has already occurred in 2001 and 2002. The solvency of individual insurers may be suspect due to reserve deficiencies.”

The insurance reserve deficiency is a function of the chronic underpricing in casualty lines in the late 1990s, as well unexpected recent increases in key loss cost drivers, particularly medical costs and litigation and settlement costs, he said.

“The reserving shortfalls highlight how inherently risky long-tail business can be; how challenging it is to estimate losses in these segments; and at times how little reliance or comfort can be placed on a sincere management effort to establish reserves at adequate levels.”

Mr Auden says managements are often wrong “because current established actuarial processes are unable to assess ultimate loss costs to any reasonable degree of accuracy”.