Fitch expects reinsurers to push for double-digit US casualty rate hikes at 1.1

Fitch Ratings has commented that reinsurers are likely to push for double-digit increases in US casualty premium rates during the 1.1.2025 renewals to keep up with higher loss costs.

In a new comment, Fitch said: “We anticipate tough negotiations with cedants as reinsurers do not believe this year’s US casualty price rises have been sufficient.”

The rating agency said that rates at the mid-2024 renewals increased by up to 15 percent for loss-affected accounts and up to 10 percent for no-loss accounts.

“In addition to further increases in January 2025, we expect cover limits and quota-share commissions to be reduced,” Fitch said.

Fitch earlier this month revised its outlook on the global reinsurance sector to neutral from improving.

In its new comment, it said that adverse loss development trends in US casualty business due to higher social inflation is a key risk to the ‘neutral’ global reinsurance sector outlook.

“Reinsurers’ concerns that market prices are too low is leading them to prune their exposure and limit capacity in the lines of business most affected by adverse loss development,” it said.

In particular, Munich Re and Swiss Re have significantly reduced their exposure.

“Reinsurers are also asking for more granular information from cedants as they tighten their risk selection. Meanwhile, demand from cedants is increasing, leading to a widening supply and demand gap and adding to the upward pressure on pricing,” Fitch continued.

It added: “We expect loss costs to continue rising in 2025 due to social inflation and US legal system abuse.”

Fitch noted that more frequent verdicts that exceed payouts of $10mn, a higher proportion of claims with attorney involvement, and evolution of the litigation funding industry will add to the trend.

It added that latent liability risks from opioids, microplastics and synthetic chemical substances known as PFAS “pose considerable challenges and uncertainty for casualty reinsurers”.

Reserve experience likely to remain unfavourable

FItch noted that several reinsurers have recently reported adverse reserve development.

This includes Swiss Re adding $650mn to its US casualty reserves in H1 2024 (following a $2bn addition in 2023), PartnerRe significantly strengthening US casualty reserves in H1 2024, and Axis booking a $425mn reserve charge in Q4 2023.

“We believe recent reserve additions have been partly out of necessity, but in some cases also pre-emptive and opportunistic, with reinsurers taking advantage of a strong underwriting period for property reinsurance,” Fitch said. “Reserve redundancies in workers’ compensation and property lines have greatly offset deficiencies in the most exposed lines, including general liability and commercial auto.”

Fitch said that US liability business from accident years 2015-2019 has had material incurred-loss development since inception, while longer-tail excess liability and umbrella business could also face further adverse reserve developments from these underwriting periods.

“More importantly, it is not clear whether US casualty incurred-loss estimates for accident years 2021-2023 will be sufficient,” it said.

Carriers have been posting more conservative initial loss ratios and higher incurred-but-not-reported losses as a proportion of incurred losses, and holding significantly higher loss reserves per claim.

Fitch said that the sector’s US casualty reserve experience “is likely to remain unfavourable through 2025”, but individual company results could vary widely.

“We do not expect reserve weaknesses to affect capital to the extent seen in the late 1990s and early 2000s, when Fitch took several negative rating actions on reinsurers. Most reinsurers should be able to absorb the necessary reserve strengthening from their earnings, with little or no impact on capital,” it added.

The rating agency also highlighted that US tort reform could help to reverse the increasing loss trend, but does not seem to be a public policy priority in the near term. It added that there is also a risk that social inflation expands beyond the US to common law countries such as the UK, or to Canada and Australia where tort law is based on precedent.

As this publication reported in our daily editions from the Rendez-Vous de Septembre, casualty was a big topic of discussion in Monte Carlo earlier this month.

A debate heading towards 1.1 will be whether current levels of firming in casualty will be sufficient to reassure reinsurers that pricing is staying ahead of loss cost trends.

Reinsurance executives during press conferences in Monte Carlo voiced their concerns over the business.

Munich Re management board member Stefan Golling said the industry had been “too optimistic” on casualty claims trends, and declared: “We need to stop fooling ourselves about rate increases.”

Hannover Re CEO Jean-Jacques Henchoz warned the industry that a number of casualty risks could become uninsurable in the future if nothing is done to rein in the litigation finance industry.

And Scor global P&C CEO Jean-Paul Conoscente suggested that US casualty “is going to be a segment where we see significant difficult discussions at renewals.” He said that most reinsurance current market conditions are adequate or attractive in terms of profitability, with US casualty being the one exception.