US casualty still in focus as reinsurers question price and reserve adequacy

Continued concerns over the health of the underlying business in casualty will put the topic at the top of the agenda again this conference season, with reinsurer sources suggesting they will take a cedant-by-cedant and program-by-program approach to upcoming renewals.

A year ago, worrying loss cost trends in US casualty – even on more recent years since the primary market correction began in 2019 – brought heightened attention from reinsurers as their focus switched away from property cat after the generational hardening they achieved at 1.1.2023.

But although there was some progress on improved pricing and terms on quota shares and excess of loss, it amounted to a relatively modest downward movement on cede commissions on the former and increased rates on the latter.

This year, the underlying business has seen something of a rehardening in areas such as excess/umbrella, as well as challenged classes such as habitational and transportation.

There has also been reserve strengthening by a number of carriers, and commentary around current and more recent accident year trends is likely to have caused further concern for reinsurers.

The debate this autumn will be whether current levels of firming will be sufficient to reassure reinsurers that pricing is staying ahead of loss cost trends. Other topics of discussion will include reinsurers’ views on other actions taken by cedants to manage their portfolios and address the impact of social inflation, legal system abuse and nuclear verdicts.

If property cat is attracting increasing supply as reinsurers look to grow and capitalise on stellar expected returns from the business, casualty is a different story altogether when it comes to their appetite – despite very strong results for the sector over the past 18 months.

“If you’re talking to the reinsurers at a senior level, everything is great, they’re having a good time of it. That’s largely being driven by property, and then as you dig a bit deeper, you do reach a layer of anxiety when you talk about casualty.

“There’s nobody really of scale looking to significantly grow in casualty. Even the more recent arrivals are more cautious than they were when they started coming in,” a senior broking executive told this publication.

They added that this increased caution doesn’t mean deals aren’t getting done, but there’s a lot more attention on the back years, the portfolio mix, how loss trends are picked, what development factors are applicable, and a host of other questions.

Reinsurers continue to publicly state their concerns over the adequacy of price and reserves in US casualty.

As reported by this publication yesterday, Hannover Re CEO Jean Jacques Henchoz said his firm remains on the defensive in the US casualty space, as he criticised the actions of litigation funders and their impact on the industry and wider society.

“We have shied away from higher excess layers on exposed treaties with Fortune 1000 companies. And we are cautious on any commercial auto and pharmaceutical exposures,” he said, adding: “The latest price corrections are insufficient for us to grow or re-enter these markets in 2025.”

Other reinsurers have privately voiced similar concerns.

One suggested to The Insurer that against a backdrop of constrained reinsurer appetite, cedants are going to have to figure out whether they retain more of their business, buy more excess of loss, or give up ground on quota share cede commissions, “because the capacity is just not going to be there”.

They observed that this will be a difficult decision for some insurers that have been reliant on the significant override they’ve been benefiting from on quota share cede commissions, which had been north of 30 percent for years.

“I think insurers are going to continue to push for commissions to be as stable as possible because they need it, or their business model basically falls apart,” said the senior reinsurance executive.

Reserving concerns

Although the insurance industry is yet to see the huge almost sector-wide reserve charges taken in relation to the so-called “kitchen sink” years in the late 1990s on US casualty, recent quarterly earnings have seen meaningful additions by some carriers, including in GL and excess/umbrella.

One senior underwriting source criticised what he sees as a “pay-as-you-go” approach to casualty reserves from 2015-2020, where some cedants are aware of what their real position is on loss costs and recognise a bit each year. Others may just not have a handle on their reserves and are belatedly reacting as trends show up.

“Almost every single treaty we looked at this year had meaningful adverse development well beyond actuarial expectations. This obviously flows through the reinsurer balance sheets as well,” they commented.

While initial concerns centered around the accident years at the end of the soft cycle, some are now suggesting that those years since the market turned may be nowhere as good as had been hoped for.

“How good were the post-soft market years? We thought these years were going to be stellar. Low limits, restricted underwriting, significant price increases and all the rest,” the senior reinsurer executive suggested.

But the early assessment of those years is that profitably is nowhere near what had been expected.

“It’s too early to call where those years will land, but if they land far short of expectations then some markets are going to run out of money with their pay-as-you-go method of reserving,” they continued.

Concerns over the adequacy of the more recent years means that in areas like excess casualty where cedants are getting increases in the teens, pressure is likely to come from reinsurers to push harder still.

“I believe the US casualty market will be a lot more difficult than people think in 2024 and this will be the main topic of conversation at conferences,” another senior executive suggested.

The underlying marketplace is operating at different speeds, whether that’s the differing dynamics between primary and excess/umbrella, or books that are more heavily weighted to auto or “heavy” general liability.

Large-account umbrella has been identified as a segment in which it be particularly hard to place reinsurance.

More broadly, there are a growing number of insurers beginning to acknowledge that the price increases they’re achieving are not keeping up with loss cost inflation.

“That’s going to put pressure on cede commissions… do I expect a 5 to 10 point decrease in commission? No, I don’t think so. But I think we’ll see it more in the two to three points of commission decrease, and programs being more difficult to place,” said a reinsurer source.

European casualty is different story

While much of the focus will be on US casualty, the consensus view at this stage is that the European casualty treaty market will be more stable.

Structurally it is different, with a greater emphasis on excess of loss reinsurance than the more quota share-heavy US casualty market.

Although there are growing concerns that some of the elements that have driven social inflation in the US casualty market could be exported to continental Europe, the results of the business have been relatively good and largely profitable.

Sources suggested that the last year has seen a trend for European cedants to retain more on individual programs, utilising a corporate excess of loss to cap enterprise exposures.