NEWS
Casualty reserve covers are in demand from insurers seeking a clean slate
Concerns over reserve development and litigation are driving increased interest in the product: Gallagher Re.
Concerns over the potential reserve development of books of casualty business is driving even greater demand for casualty reserve covers, as insurers look to draw a line in the sand and put any past underwriting mistakes behind them, Linda Johnson, vice chair, Gallagher Re North America, told APCIA Today.
“In casualty business, the equivalent to a big cat loss is when something happens to your reserves,” she said. “A single change in the future, maybe to the litigation environment, can impact all your reserves in a way that can be significant. Reserve covers can be a good way of solving these problems and securing certainty for insurers.”
Johnson, who joined Gallagher Re in June 2023, spent 15 years at TigerRisk Partners, where she was a founding partner, executive team member and most recently served as global legacy solutions practice leader. She launched a reserve covers offering at TigerRisk and is spearheading the same at Gallagher Re.
She says demand for such policies is being driven by concerns over loss development trends in the current market—inflation is increasing the size of claims while litigation trends including so-called nuclear verdicts represent a big concern for the industry.
Johnson said it is rare that reserves get better with time—by definition there is a “skew to bad outcomes” but it can make a lot of sense to transfer them. For example, a reinsurer with little casualty business could benefit from the diversification of taking such business; in contrast, a cedant with a big casualty book can benefit from significant capital relief.
“Reinsurers remain supportive of new business and are responsible in their approach.”
Linda Johnson, Gallagher Re
Reserve protection covers take a variety of forms: from adverse development covers, which work similar to excess-of-loss covers attaching at or above carried reserve levels, to loss portfolio transfers to legacy covers, which can help carriers exit discontinued lines of business.
Some of the benefits to carriers include capital relief, certainty and protection on adverse loss development and the ability to effectively exit lines of business in some cases.
While Johnson advocates their use, and acknowledges higher interest in the product, she also believes the casualty sector is more balanced at the moment than some commentators have suggested. She said reinsurers remain supportive of new business and are responsible in their approach.
“I am feeling good about new business, the underlying drivers and where reinsurers are on casualty lines,” she said. “It is important to remember that casualty is a very broad spectrum of lines. There is some noise over ceding commissions and reinsurers are nervous about adverse development in some areas. But their support is there.”
She played down concerns in the industry around potential claims stemming from per- and polyfluoroalkyl substances (PFAS), widely used chemicals now associated ill health and pollution in many areas—and dubbed by some as the industry’s new asbestos.
“I have less concern for insurers than the insureds,” Johnson said. “This is not a risk that was intended to be transferred to insurers. Is it a risk? Yes. But the insurance policies are pretty good.”
Main image: Shutterstock / vlastas
