Reserving cycle

US property and casualty accident years 1997 to 2001 were written in a soft market. According to S&P, they absorbed most of the reserve strengthening the market booked from 2002 to 2005, long after the accounts for those years had shown presentable results. The reserving cycle names that lag. In a soft market rates fall, but the a priori loss ratio fed into Bornhuetter-Ferguson often comes from the business plan, which assumes rate cuts are offset by better selection or tighter terms. On the young years of a long-tail line the method leans almost entirely on that prior: pricing optimism flows into the reserve, and observed experience contradicts it only as the years develop. The adverse development shows up three, five, eight years later, often once the market has hardened and recent years can absorb it. The reverse happens in a hard market, where cautious priors from a plan that has just booked rate increases produce favorable development that flatters later accounts and goes along with the softening of prices. The reserving cycle therefore amplifies the underwriting cycle, because results that look too good during the soft phase delay the pricing correction. Teams that watch for it compare the selected prior with the cumulative rate index since the last year judged mature. They also track successive ultimate estimates by accident year, where the flaw shows more clearly than from one valuation to the next. Cape Cod, which draws its loss ratio from the triangle, serves as a cross-check, with its own biases across the cycle. Not to be confused with the underwriting cycle, of which it is the delayed reflection, nor with under-reserving, which can have other causes.