To what extent are reinsurers on top of soft-year casualty reserving issues?
Chris Ross, managing director at Guy Carpenter, treaty broking, North America: There is going to be a range of reserving outcomes depending upon a few factors: composition of portfolio, size of portfolio, proportion of structure types supported (QS vs XoL vs clash) and years of participation. Reinsurers all had different strategies in the core soft-market years of the mid-to-late teens that will be a large determinant of how quickly they have gotten their arms around the reserving cycle.
Importantly, adverse development is a function of what the initial reserving level was, so those that established the initial benchmark too low will see more adverse development than others. Typically, reinsurers are pretty conservative when setting initial casualty reserving levels, which could lessen the amount of adverse development.
Sven Althoff, board member, Hannover Re: In North America we are still seeing continued elevated loss activity being reported in the years 2016 to 2019 by several of our clients. As such, we don’t consider this to be over yet. While we have seen elevated loss trends over the past few years, we and many of our clients have taken steps to address this trend. This is where we will certainly differentiate in our approach to renewals with clients.
Thomas Blunck, board member, Munich Re: Issues related to casualty reserving aren’t confined to soft-market years alone: they are a persistent challenge for all the casualty market, regardless of the market cycle. As a result, while reinsurers have implemented strategies to mitigate these risks, doing away with them completely is elusive due to the complex and evolving nature of the casualty landscape. Continuous high pressure on reserves from soft-market years remains a concern, as these periods often involve more ambitious underwriting and pricing, which can lead to under-reserving.
Given that casualty insurance is inherently long-tail, there is an enduring level of uncertainty due to factors such as legal changes and social inflation. These uncertainties necessitate adjustments in limits and rates to better manage potential future liabilities.
Jean-Paul Conoscente, CEO of Scor P&C: The casualty reserving problem is driven by US casualty, which is the largest but also one of the most challenging insurance markets, with high loss ratios and social inflation driving underperformance. An increasingly litigious environment, driven by social inflation pressure, longer litigation periods, often associated with complex cases leading to nuclear verdicts, and litigation funding are major contributors to the current liability crisis. Reserve adjustments for casualty [business] is not over as the evolving risk landscape, uncertainty and social inflation pressures will remain adverse and start extending internationally.
The underwriting improvements made over the recent years have not been enough yet to offset rising claims costs. However, we expect the magnitude of these future adjustments to be at much lower levels than were booked in the previous years, due to improved awareness, underwriting, risk management, pricing and reporting measures.
What will dominate casualty renewal conversations for 2025?
Althoff: The trend towards ever-higher awards and rising social inflation will remain high on the agenda. In North America, inflation and features of the legal system like low barriers to bad-faith claims and litigation financing will remain important issues, as well as limits management. Loss occurrence and development will also be a critical component of our discussions with clients. In Europe, the focus will be on the development of original prices and conditions, but issues such as social inflation will also remain important.
Blunck: Several critical issues are expected to take centre stage, like the persistent problem of legal system abuse and the prevalence of nuclear verdicts, which mean uncertainty remains high, with no signs of improvement. This ongoing unpredictability will be a major concern for insurers as well as reinsurers.
Additionally, litigation funding, which has been a significant factor in the US, is now becoming a topic of interest internationally, further complicating the casualty landscape. Moreover, the D&O insurance market continues to experience rate decreases, adding to the challenges faced by insurers in terms of maintaining adequate reserves.
These factors and others will all contribute to a complex and demanding renewal environment, where balancing competitive pricing with the need for sufficient risk management will be crucial.
Ross: We expect the conversations to be pretty similar to the conversations we have had for the past 12 months: it will be a function of rate increases, how much or little do those rate changes exceed loss trend, have loss trends increased and to what levels, and showcasing the profitability levels of the 2020-2023 years.
Deep dives on the impact of the underwriting actions carriers took in the hard market (limit reductions, terms and conditions changes, retention increases and the aforementioned rate increases) will be in focus and will be what we will be emphasising in our negotiations. From an underwriting perspective, reinsurers will be watching for any increases in limit usage and the adoption of PFAS exclusionary strategies for exposed industries.
Simon Hedley, CEO of Acrisure Re: On casualty reinsurance, the underlying business is diverging between international and US. There remains a great deal of market caution around commercial US general liability, and excess/umbrella, and professional liability while competition for the original business is heating up in many non-US jurisdictions. All in all, reinsurers will again pay a lot of attention to the back years and forward pricing and look to substantially back existing clients that are showing expertise and discipline in their areas of market focus with reasonable terms and conditions.
How far should European and UK writers be worried about expansion of social inflation beyond the US?
Althoff: This will certainly be a particular focus of attention. In general, the potential sources of social inflation are also increasing in Europe, with the main exposure being with industrial and higher mid-market risks, as well as public entities such as municipalities.
However, it cannot be assumed that social inflation will be of the same magnitude as in the US. The potential impact will depend on the underlying treaty exposures and countries, as well as the different case law and more limited litigation funding in the EU.
Blunck: So far, the UK and EU have remained stable compared to the US, but there is certainly an increasing use of litigation funding and collective redress mechanisms are being introduced or revised, also in the UK and EU countries. Furthermore, we consider the increasing gap between rich and poor to be a risk in connection with social inflation. Nevertheless, I believe that better social security systems and different litigation systems compared to the US – e.g. no juries, different approaches to collective redress – are mitigating the situation in the UK and EU. What we are observing is a high-inflation environment aggravated in the UK by the Brexit, and stemming from supply chain and staffing issues, e.g. in the care sector.
Conoscente: Social inflation has already spread to Europe, leading to an increase in liability claims and higher settlement amounts. Third-party litigation funding significantly contributes to this trend, with the UK and Australian markets being the most active contributors. The evolution of the regulatory framework (e.g. adoption of the EU Representative Actions Directive) has further emphasised this shift in Europe. As a result, insurers are increasing premiums, limiting coverage and investing in proactive defense management and data-driven decision making. The main difference so far has been a more reasonable litigation environment than the US but this will likely evolve.
Ross: If there is US exposure for an original insured, they should be very concerned because that company has as much US exposure as a US account. Otherwise, the fundamental differences between the US and non-US legal systems are an important limiter on how much social inflation can transfer outside the US. Examples include the “loser pays” guidelines [which helps to] remove frivolous suits from the system and the non-existence of punitive damages and bad faith awards remove that source of severity. However, we are seeing a social impact on court awards and legal interpretations outside of the US that has a social inflation impact, just without the same severity levels as in the US.
What can or should the sector do to push for legal reform to limit swelling legal awards?
Ross: The industry needs to continue to educate consumer and business organisations (such as local chambers of commerce) to advocate for reform at the legislative level. Unfortunately, change does not happen just because insurance companies say reform needs to occur. More often than not, meaningful change happens when the system breaks and businesses or consumers are unable to secure required coverage. That’s the dynamic that needs to shift and it will help protect the system from creating these types of cycles.
The current uncertainty around court outcomes is almost forcing carriers to settle claims before reaching courts. The inability to push back now in the judicial system is also a key part of the issue leading to an increase in case costs and settlements.
Conoscente: The sector should promote tort reform and transparency, including full disclosure of all parties with a financial interest in civil lawsuits. In addition, insurers and reinsurers must educate the public and raise awareness of the impact and consequences of these swelling legal awards. While this will require significant upfront investment, it is essential to curb potential abuses in the long term.
At the same time, cooperation between insurers, regulators and technology providers should be strengthened to innovate, adapt to, and address the new liability challenges (including pre-emptive and mitigating measures, early signal detection, litigation cost control strategies, etc).
Finally, it will be essential to maintain strict underwriting discipline and improve transparency in underwriting and claims processes to build trust and ensure fair practices.
Blunck: As an industry, insurers and reinsurers should take the time to jointly educate the public and raise awareness of legal-system abuse and its impacts. In a survey Munich Re and APCIA conducted earlier this year, 86% of respondents agreed that state and federal lawmakers should address abuses of the legal system to restore fairness and balance to the civil justice system. While verdicts continue to increase, many lines of coverage have not yet reached price adequacy, which means carriers will be less likely to offer higher limits, and the limits that are offered will be at a higher premium. If left unchecked, legal-system abuse will lead to higher insurance costs, financial strain on insurers, depletion of municipal resources, and disincentives for businesses to take risks.