NEWS
Bumpy renewal looms for US casualty
Liability has plenty of issues, but profit and reinsurance capacity haven’t been among them, says Fitch.
Don’t mistake the very public handwringing by reinsurers citing their concerns around loss trends in US casualty lines with an ability to make meaningful changes to a line of business that remains profitable, for now, despite new capacity entering in recent years.
That is the view of analysts at Fitch Ratings. “We are seeing more focus on casualty given the levels already achieved in property,” Brian Schneider, senior director for global reinsurance, Fitch, told Baden-Baden Today.
There was a strong shift of capacity into casualty as nat cat fell out of favour in the years prior to the 2023 reset. But Schneider acknowledges reinsurers’ causes for concern about a “risk they’ve timed for a period when claims inflation picks up”.
“They are now trying to get ahead on this; to talk as strongly as they can for the trends they see in casualty,” he suggested.
The reasons for concern are multifaceted and complex. They include the impact of economic inflation, which threatens both reserves and future claims trends, and which also continues to influence casualty-sensitive wages, medical and services costs. There is a worry that COVID-19 had obscured and delayed true loss development trends. Meanwhile, social inflation and court awards are increasing and driving losses.
Comments from the front line
All this means a strong suggestion that primary pricing could be well short of the mark. Most of the big reinsurers have commented on these concerns in recent months. Hannover Re chief Jean-Jacques Henchoz vowed to be “very conservative in our steering”.
Munich Re board member Stefan Golling suggested US casualty requires more than just more rate to stay ahead. Swiss Re chief underwriting officer Gianfranco Lot said he’s “not happy” with the line. SCOR said litigation-exposed US casualty will be trimmed outright.
“We are seeing more focus on casualty.”
Brian Schneider, Fitch
Lloyd’s has also taken notice, putting syndicates on warning that 1/1 2024 casualty renewals could be bumpy. Casualty renewals have “an eerily familiar feel” to the property market of 12 months ago, Patrick Tiernan, Lloyd’s chief of markets told underwriters in his Q3 market message.
But none of this has resulted in any sign of a swing in the supply-demand balance for reinsurance, Jim Auden, a managing director at Fitch who heads the North America P&C group, told Baden-Baden Today.
“It is not as though we’ve seen withdrawals of capacity,” Auden said. Casualty reinsurance remains “driven by competition”.
Talks heading into 1/1 will be an interesting balance: a very legitimate list of uncertainties but with proof of those concerns yet to show up on insurers’ bottom lines.
Unclear outlook
The outlook is “definitely a question mark”, Auden acknowledges, noting “you see severity issues all around yet somewhat of a moderation in pricing in casualty”.
That is partly because financial results have remained “favourable”, he said. “Pricing adequacy could slip in the near term as a result, but there is no escaping the hard data suggesting that loss costs continue to rise.”
Drilling down into individual lines, workers’ compensation continues to post the best underwriting profits of any major commercial lines segment. It delivered an 89 percent average combined ratio for the last five years through 2022, Fitch noted in recent research.
“There is no escaping the hard data suggesting that loss costs continue to rise.”
Jim Auden, Fitch
Other liability lines, measured on a claims-made basis, look strong among major commercial lines with a five-year average combined ratio at 95 percent, including 89 percent for 2022, which Fitch attributes partly to improvements in professional liability. Occurrence-based combined ratios moved above the 100 percent mark in 2022 on reserve development which, Fitch notes, “varies by segment”.
The COVID-19 pandemic meant a pause in claims that now means trends are harder to predict, Auden said. If social inflation “springs back with a vengeance” it can hit not only new accident years, but periods before the courts shut down. All this will “definitely mean reserving challenges”, he added.
Litigation finance may be a driver of loss trends, very much as reinsurers have warned. It means less reason for claimants to agree to early settlement, and each winning verdict creates a vicious circle.
“It remains tricky to actually point out a trend,” Auden said.
If any line merits concern, it may be D&O, Fitch says, where rates have headed downward. A prior “tremendous” hardening brought a bit more capacity and competition than the market could easily handle. “With the success of the business, you see new capacity coming in,” Auden said.
While the US D&O segment continued to generate favourable loss ratios through the first half of 2023, still riding on what was a hard market through 2021, the “likelihood of sustainable segment profitability at current levels has been greatly reduced” by the 2023 downturn in pricing and potential for claims volatility, Fitch said in recent research.
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