Caution over US casualty continues to reverberate among global reinsurers in light of claims litigation trends and reserve strengthening.
However, sources indicated that the market supply for US casualty reinsurance remains largely stable, as cedants push for improvement in underlying portfolios and interest rates remain attractive.
Within that overall stability, reinsurers are showing mixed appetite for growth, depending on their loss experience from soft market years.
Brokers’ mid-year reports commonly indicate minor changes being made in clients’ reinsurer panels – whether due to disagreements in the underlying performance or cedants diversifying their panels to help drive price competition among participants.
Negotiations have become tougher, with reinsurers asking for more data from cedants and exerting more scrutiny over underlying portfolios than ever before.
Carriers are continuing to push for improved terms, but quota share renewals this year have largely renewed flat, with ceding commissions unchanged or down a point, sources said.
While ceding commissions are not the sole marker of market dynamics, it is an indicator of where the tug-of-war between supply and demand has landed.
As of now, the pointers for H2 2024 are indicating a state of stability where reinsurers do not have a clear upper hand, despite the fear around claims inflation and clients’ casualty reserving charges.
Most sources predicted those dynamics will largely extend into 2025 as well.
Nonetheless, every reinsurer source said they found the series of casualty reserving additions from primary carriers “concerning”, as a sign that the industry is still playing catch-up to accident years 2019 and prior.
The scope of Q1 and Q2 2024 reserve strengthening in casualty has been relatively narrower than Q4 2023. But it has continued to surface at respected names in the industry such as Travelers and The Hartford.
On that note, more sources pointed to unease around 2020-2022 loss picks compared to early 2024, when the broad narrative in the industry exuded more confidence around recent accident years.
However, mitigating this fear are improvements on the underlying portfolios that are taking place simultaneously as primary insurers strengthen reserves.
Rates are still increasing on top of the corrections achieved in the hard market years of 2019-2021. Some sources have indicated a further acceleration of rate increases in the primary casualty business recently compared to six months ago.
Some insurers have also publicly acknowledged bumping up their loss trend assumptions this year – a measure which reinsurer sources generally viewed as positive and adequate.
More importantly, compressed limits are holding. Sources have told this publication that $5mn is not uncommon for lead excess casualty limits, whereas last year $10mn was still on the table. At the end of the soft market years, the average for excess layers had been closer to $25mn.
In short, reinsurer sources recognised that a lot of “heavy lifting” had been done in limit management.
Rates, however, will remain a discussion, given the question marks around loss cost trends and rate adequacy persist.
“The underwriting improvements made over the recent years have not been enough yet to offset rising claims costs,” said Jean-Paul Conoscente, Scor P&C CEO, in our virtual Monte Carlo roundtable.
By line of business, the trajectory for D&O and cyber will be of particular focus. Primary public D&O rates have been falling for a few quarters now. In cyber, the CrowdStrike outage seems to have largely been a “non event” for reinsurers but has nonetheless sparked an awakening around the vulnerable nature of the business.
There is no doubt that casualty reserving this year was bad news, but at the same time, bad news can be what keeps discipline around in the marketplace.
“The worst news that's bleeding out from the industry we hope will be a leveler in terms of people not losing their minds on rate going forward,” said one underwriting source.
Leaders shed casualty
Some reinsurer sources noted that a counterargument from brokers is that recent accident years 2021-2023 are performing better and should be seen as an offsetting factor to earlier years.
“The problem we face is that clients tell us they believe in the business so much that if we see compression on the ceding commission, we’ll just retain more,” one carrier executive said.
“That kind of feeds into demand for the business and compromises the belief that ceding commissions should be going down.”
In addition, interest rates are still holding up, meaning from an investment gain perspective, for the first time in decades, this is a good time to be writing long tail lines of business.
But as mentioned above, reinsurers are showing mixed appetite and some have taken a harder stance than others.
Swiss Re recently disclosed that it had reduced its US liability book by 21% year on year as of June 2024.
“If we can’t get that better pricing, we walk away, and that’s what we’ve been doing,” CFO John Dacey told analysts during the conference call.
Munich Re cut its volume for casualty proportional by more than 20% in July renewals. Significant reductions were made in D&O, general liability, and cyber where clients failed to meet its requirements, according to its Q2 investor presentation.
Namely, “rate increases [were] not sufficient to cover elevated claims inflation”.
Everest also shed over $300mn in renewal premiums this year in casualty pro-rata, according to CEO Juan Andrade. D&O, workers’ compensation and other casualty lines exposed to social inflation were segments where the firm took a prudent approach.
It is likely that reinsurers will continue to quote aggressively for lower ceding commissions or higher XoL rates, at least in early renewal negotiations. The question is whether those stances will start to stick, after a year when reinsurers have largely settled for flatter rates in order to stay on programmes.
Social inflation woes
As seen in executive commentary and the continuing reserving actions, the P&C industry still lacks confidence that it has got its arms around claims inflation.
Covid-19 and the slowdown of US courts had caused a major disruption in the industry’s understanding of nuclear verdicts and other social inflation trends.
So far, WR Berkley and Travelers have made comments implying that they are nearing the end of their Covid-19 backlog year claims.
“That element of uncertainty is to a large degree behind us,” Travelers CFO Dan Frey told analysts.
However, a deep-dive analysis by the Insurance Insider US research team suggested the Covid-19 case backlog has still not cleared years after the closures.
US Court data has showed the number of pending cases remains elevated, whereas the number of terminated cases has not yet seen a commensurate uptick that would suggest an easing of the backlog.
Moreover, studies suggest that nuclear verdict trends have only continued to worsen over time and will likely continue to do so, given the socio-economic drivers of nuclear verdicts are still intact.
Woes around social inflation have reached other markets as well outside the US, where the trends are not as severe but nonetheless developing. Third-party litigation funding, for example, is now also active in other markets such as UK and Australia.
However, none of them are a match to the US’s litigious environment and social inflation trends. With legal reform being an open-ended question, sources say it’s unlikely that the macro view around casualty will change in the next few months, or years even.