NEWS
Casualty is in for a bumpy ride as correction is needed
After being overshadowed by problems in property-cat at the last renewal, the casualty markets now need a correction, says Brit.
Casualty reinsurance may very well become the rugged side of the 1/1 renewals as a host of growing and uncertain risks retake their proper weight in the debate, having been overshadowed by the property-cat market for too long, casualty underwriters from speciality re/insurer Brit have told Baden-Baden Today.
“It will be a tough 1/1 with a lot of surprises,” Natalie Lambert, a casualty treaty underwriter at Brit for the past 18 months after having cut her teeth at Arch-Barbican, said of early impressions from Baden-Baden. “The biggest surprise is the variance in views; I don’t think it is going to be so comfortable.”
Simon Bird, active underwriter for Brit syndicate 2988, concurred about the pending path to 1/1. “Casualty is going to be very deal-by-deal,” he said. “Some deals are awful and there will be some tough arguments as people feel they are in a different place.”
In some cases, newly achieved investment yields “colour a lot of people’s thinking”, Bird said, implying that carriers could again fall into the trap of relying on investment results at the expense of solid underwriting.
Variance in views is largely a function of variance in strategy, Lambert indicated. “Some are targeting growth and see opportunity in the market; others I think are scaling back and don’t see the margins or the room for growth, especially when segments such as cyber or D&O are mentioned,” she said of the scope of tone hitting the tables at Baden-Baden.
“Some are targeting growth and see opportunity in the market.”
Natalie Lambert, Brit
The nuances of casualty
Bird, in his 13th reinsurance soirée at Baden-Baden, sounds a bit surprised by how surprised the remainder of the field can be. For him, variance in views has resulted in variance in applying some underwriting basics.
Strong conditions in casualty quota share in recent years may have caused some measure of overconfidence, Bird says. This encouraged many carriers to target the sector at the expense of property. “People found it in their hearts to like casualty more,” he said.
Lambert added that some entrants were not prepared for the nuances of the line. “Not all the new entrants had the necessary experience,” she said.
Bird added that the problem was compounded because some areas of casualty business are indeed easier than others.
“If you are a casualty underwriter in the past few years, particularly pro rata where conditions have been strong, you’ve got a tailwind there—quite a well-priced book,” Bird said. “But you have just one dial to turn: the underlying loss ratio the cedant will make, plus your call on a ceding commissions.”
Meanwhile, there is always the unknown of how previous underwriting years will perform—and if reserves are adequate. “It’s too soon to make the call while you sit comfortably on recent years that look good,” Bird said. “You just don’t know how good your back years are.”
“You just don’t know how good your back years are.”
Simon Bird, Brit
Discipline is needed
Short-term quota share success can lull some into a false sense of security on the complexities of discipline. Carriers that then move to excess of loss casualty reinsurance have many more moving parts to factor in: from inflation assumptions against the attachment point and the breadth of the tail, to new loss development factors, to underlying rate adequacy, and more.
“Dial any of that down slightly, intentionally or not—get it 80 percent right on those inputs, and the compound miss is huge,” Bird said by way of warning.
The risk is that an underwriter will end up attaching at or below his/her loss assumption and start the deal from losses. That means that, as with property a year ago, retentions in casualty will likely need to be just as big a part of the debate to 1/1 as rate.
“One thing I’ve learned in decades in this sector: if you attach too low you get killed in the end,” Bird said. “Make the mistake in highly attritional lines such as motor excess of loss and your fate may be sealed.”
The most likely miss, which could result in a big loss, is the one element straight out of the original underwriter textbooks: inflation, although social inflation has been talked about for decades, he concluded.
Main image: Shutterstock / Xuejun Jiang