BHSI’s Beaver: middle-market inflow drives casualty E&S submissions up 30 to 35%

Alex Beaver, senior vice president of the southeast region for casualty at Berkshire Hathaway Specialty Insurance, reported a significant increase in middle-market business flowing to casualty E&S underwriters as admitted carriers retrench.

“Middle-market firms are seeing more unpredictable jury verdicts, and that is driving it out of the standard markets. So, specifically, we're seeing about 20 percent heavier submission flow, but in certain classes, it's upwards of 30 to 35 percent,” explained Beaver.

Beaver attributed the hardening of the casualty market to the US litigation environment, aligning with observations shared by other underwriters at the WSIA this year.

Navigators’ Michael Garrison also told this publication that some areas of the US casualty market could become uninsurable if legal system challenges are not addressed

“What's really driving things [the hardening of the casualty sector] is the legal system,” Beaver said.

Speaking to The Insurer TV, Beaver explained that the market is responding by reducing capacity and tightening underwriting conditions, to the extent that carriers are pulling back capacity on risks from which they are seemingly well insulated.

“In conversations with brokers, the biggest trend I’ve heard about is capacity reductions. Everyone’s trying to figure out how to manage nuclear verdicts,” Beaver said.

“I was just talking with a broker who mentioned that in a 5x25 layer, the carrier wants to reduce capacity to $3mn. It’s pretty wild to see a cut from five to three in [that] layer.”

“We’re seeing this manifest throughout the tower. Carriers are pulling out, and underwriting restrictions are tightening across the board," added Beaver.

Beaver also expected prices in the affected casualty lines to rise for the next two quarters.

“Over the past three or four quarters, prices have been going up, and we’ll probably see that continue in the next couple of quarters. There’s a lot of upward pressure on pricing,” said Beaver

Casualty models getting better, but can struggle with the E&S market

Beaver noted that modelling in the casualty space has improved, particularly as companies move away from relying on Insurance Services Office (ISO) rates and toward their own data and statistical analysis.

“With modelling, there’s been an over-reliance on ISO rates and traditional methods of pricing excess casualty, such as taking a percentage of an underlying layer or using unit rates for auto. It’s a very non-technical approach. I believe carriers are trying to move towards a more data-driven, statistical focus.” said Beaver

However, he acknowledged that statistical models can struggle in the E&S space due to the unique risks it involves. He emphasised that underwriters need to be aware of what casualty risks their models can’t be relied upon to predict.

“In E&S, there are a lot of unique risks that can be challenging to model. Statistical methods might not be suitable for every individual risk.

“Underwriters really have to think about what their model tells them; they have to understand the ins and outs of it. They have to know when to rely on modelling; they have to know when to throw it out,” he explained.

One particular set of risks that Beaver pointed out as challenging for models was emerging environmental issues, such as PFAS.

“Our models are backward-looking, but the future might not resemble the past. That’s key. There’s more uncertainty, and uncertainty is expensive. We’re seeing major torts around PFAS, and we’re not really able to model that. There could be new torts on the horizon with microplastics, methane emissions – things we haven’t even considered yet,” Beaver concluded.

Watch the full interview to hear more about: