I’m going to start a new semi-recurring feature of short posts called IANS ALERTs. Recall, from the recent post on pricing, I introduced the concept of IANS = Incurred And Never Spoken. These are shadow reserves that companies know they need but forget to tell the actuaries!
When I come across examples of IANS, I will share them in these brief ALERT posts. Our first example comes from a new report on class action litigation put together by Chubb. You can find it here. It does a really nice job reviewing the progress the plaintiff’s bar has made in recent years extracting their pound of flesh from corporate balance sheets (and the related insurance policies). It is definitely worth your time to give it a read.
IANS Happen When Reserves Don’t Match The News
However, I couldn’t help think while reading it, if the litigation environment has turned so adverse, why have we not seen pressure on D&O results? A cursory look at most companies’ OLCM results (proxy for professional liability) shows steady accident year picks (even though development has flipped from early year releases to early deterioration). If they are seeing these worsening trends, the reserves don’t appear to reflect it!
This suggests companies may be aware of an impending problem but have not reflected it yet in their financials. This is textbook IANS reserves. It is too early to book anything concrete, so let’s ignore it rather than add to our IBNR.
Chubb didn’t break any news in their report. They did a good job summarizing the trends and advocating for change, but there was no big reveal of previously secret information.
These facts are well known…unless you’re an actuary. That’s why we try not to speak of IANS. We don’t want the actuaries to hear and start asking uncomfortable questions!
IANS Explain Why Pricing Goes Up
One other telltale sign of IANS is when companies start raising prices, especially when they have known for years pricing was borderline unacceptable. The kick in the pants that tends to bring resolve to finally move on pricing is IANS.
When you know the adverse development is about to show its face, that’s when the religious conversion happens and not until then. Pricing unfortunately doesn’t move just because returns are lower than target. Pricing moves when a problem is about to emerge. No wonder we are seeing D&O pricing move higher.
IANS Are Greatest For Severity Writers
For clarity’s sake, I am not singling out Chubb because they wrote the report. The issues they describe apply to every insurer in the professional liability space as well as product liability and general liability.
In fact, the most IANS tend to exist in London and Bermuda with the excess writers. When you write excess D&O, it’s really easy to say “yes, we are aware of that suit but it will never reach our layer”. Unfortunately, some of these claims will reach your layer. And you got a lot less premium on that layer than the guys writing primary. Low frequency, high severity lines create the most IANS.
Given this is already a little longer than I wanted it to be, I’ll wrap up with a warning: IANS eventually become case reserves…and those run through earnings.