Prior-year reserve development
The difference between the reserve carried at the previous closing and the now estimated cost of the same claims, the most direct indicator of whether past reserving was honest.
Starting in 2023, the US liability market booked adverse prior-year development several years running on accident years 2016 through 2019, eaten into by social inflation, and several large groups strengthened those vintages by hundreds of millions of dollars. Prior-year development measures that gap. At every closing, the cost of claims incurred before the start of the year is re-estimated. If the estimate falls, the released surplus is favorable development and flows to income; if it rises, the top-up is adverse development and flows to expense. It is a grade handed out after the fact to last year's actuaries and claims handlers, and its sign has to be read across several years before concluding anything. Large recurring favorable development betrays conservative reserving that tied up capital and smoothed earnings, which supervisors treat as a hidden reserve. Recurring adverse development signals structural under-reserving, which allowed flattering combined ratios and rates set too low. IFRS 17 and Solvency II both present it separately from current-year results, so that one cannot quietly fund the other.
The US liability market booked adverse prior-year development for several consecutive years starting in 2023, driven by social inflation on accident years 2016 through 2019, with several large groups announcing reserve strengthening of hundreds of millions of dollars on those vintages. Conversely, a property insurer releasing 4% of opening reserves every year for five years is not making money: it had set aside too much.
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