Swiss Re’s Baertschi: Re-underwriting in US liability has not yet fed through
Swiss Re P&C CEO Urs Baertschi has warned that US liability claims trends are likely to continue to outpace economic inflation over the next two years, with further re-underwriting efforts needed for the business line to become profitable.
Addressing a media briefing at this year’s Rendez-Vous, Baertschi echoed concerns from across the market over the elevated litigation environment in the US.
In 2023, there were 27 cases of courts awarding more than $100mn in compensation, while verdicts faced by corporate defendants last year totalled $14.5bn.
The growth in US liability claims has outpaced economic inflation over the last decade. Based on current trends, Swiss Re estimates that claims growth will outweigh the benefit of higher interest rates on casualty lines in one to two years.
“Clearly there is a cost to society, in the US in particular, as a result of elevated litigation activities,” said Baertschi. “One of the reasons why we’re focusing on this is that the US remains the largest insurance and reinsurance market. So this is a real industry issue for us that we are working through.”
Gianfranco Lot, chief underwriting officer for P&C Re at Swiss Re, added that median limits purchased declined by ~46 percent in real terms between 2014 and 2023.
For industries with heavy losses, this was even more pronounced. According to Swiss Re, the median liability limit of $350mn in the chemicals sector was down 50 percent over the decade, while the transportation sector saw a 72 percent reduction to $323mn.
“In conjunction with the rising demand for insurance on the property side, we see a contraction on the liability side. The insurance industry is not supplying the limits that they were supplying 10 years ago, and that has clearly an impact ultimately on the corporate clients,” said Lot.
“The good news is, over time, this line of business becomes more profitable because of the re-underwriting efforts that have been done in the past four years or so. We don’t believe we're there yet.”
He added that Swiss Re’s US liability book is currently “underweight” compared to others. The Zurich-based reinsurance powerhouse generally has around 10 percent market share across lines of business.
“[US liability] is below that 10 percent, we’ve managed the book quite a bit down. Clearly we have done a re-underwriting effort over the past five years to put us into a position which is far below that 10 percent. Loss ratios will depend by book, but clearly it’s not a pretty number over the past years. That’s why we have also adjusted our reserves accordingly.”
Lot concluded that while similar patterns in litigation activity have been observed in the UK, the Netherlands and Australia, on the whole there is appetite from market participants to provide support, and sometimes grow, in non-US regions.
“This is certainly something that we’re keeping an eye on, and we would suggest that our insurance clients and corporates should as well. I wouldn't say it’s a non-insurability topic yet, but there’s certainly pressure.”
Consistent renewals
Aside from US casualty pressures, the wider market environment is expected to remain consistent at the upcoming renewals.
“Our expectation is that the environment that we’ve seen earlier this year and last year will largely remain the same, including the discipline in the market and the balance of the risk sharing between the insurance and reinsurance industry,” he said.
Maintaining these dynamics will enable reinsurers to return to their historical role as shock absorbers, following seven years in which on average the global reinsurance industry did not earn its cost of capital.
“The last six quarters have been a little bit better, that’s true, but there’s studies that for the last seven years, the reinsurance industry would need to earn between $40bn-$100bn more just to get back to the average cost of capital,” Baertschi added.
“So there’s a long way to go before that equation is in balance. To a certain extent, what we saw in the beginning of 2023 coming out of those years of imbalance was a pretty massive reassessment of risk sharing between insurers and reinsurers, but I think it’s important to look at this over a longer period of time.”