Often the poor relation of the sexier cat market, casualty has been the star of the show at this year’s Monte Carlo Rendez-Vous.
The health of the US casualty market has been central to discussions on the Cote D’Azur. Reinsurers talked their books. Clients and brokers countered. But what has often in the past felt like an arm wrestle between different groups on market conditions this time felt more like a game of three-dimensional chess.
Rather than solidifying a clear set of answers as it sometimes can, the conference’s dense exchange of views only served to sketch out the complexity of the issues.
There are seven pertinent questions that should shape understanding.
1) How should you disentangle the effects of social inflation, the pandemic, and limit tendering to form a view of casualty reserve adequacy?
The challenges of the 2014-19 accident years are well understood, with soft-market indiscipline and large limits combining with an atrocious tort environment to spike severity.
The stay-at-home pandemic economy completely upended dynamics by slashing exposures, and by putting the existing claims inventory into deep freeze. At the time, we called it a “get-out-of-jail-free card on frequency”, and that still looks likely.
However, by lengthening the tail on the settlement of outstanding claims in an extremely inflationary environment, severity was further driven up, increasing losses. Some believe that the slow dropping-out of this effect is due to a structural tail-lengthening reflecting an increased propensity from claimants to go to trial.
These effects have complicated the picture on reserving the accident years from 2021 onwards, and created a greater range of uncertainty in a class that is always subject to high levels of unpredictability.
Sources argued that the typical actuarial analysis of loss triangles with the lengthened tail points to significant problems in the current accident-year. However, multiple sources across the underwriting and broking divide cautioned that judgement must be used in this instance, with the actuarial analysis on loss development patterns likely to exaggerate the extent of the issues.
Regardless, insurers and reinsurers are taking a progressively more bearish stance on the 2021-23 accident years, partially owing to higher deficits in 2015-19 and the need to trend losses forward from a higher base after reserve strengthening.
Increasingly, sources are also pointing to much higher loss trends than were discussed last year. Where often there was talk of a high-single-digit trend in excess casualty, now increasingly sources are pointing to low-double-digit or even low-to-mid-teens as their estimate.
In February this publication referred to the view that the 2021-23 accident years will turn out to be bad years as the casualty heterodoxy. The view is less heterodox now than it was then. And if not bad, it is widely accepted they will be worse than was thought.
Importantly, challenges in these years will impact the industry asymmetrically, depending on the initial levels of loss picks. Companies reserving GL in the mid-50s, which started reserve takedowns, will struggle far more than companies at 65% or above that have passed the marshmallow test on reserving.
The other complicating factor is the increased propensity of insurers to tender limits when faced by claims. Sources suggest this reflects the huge limit compression, with insurers historically determined to defend $25mn limits, but more willing to roll over on $5mn layers.
Case-closure rates are starting to increase, it is understood, suggesting that a lengthening tail will swing to a shorter one. Where this new effect settles and how it plays through will also help determine the market’s trajectory on profitability.
2) How high and how long will the casualty “micro cycle” in pricing go in 2024, 2025 and beyond?
Insurance Insider US first flagged the brewing of a pricing micro-cycle in US excess casualty in Q4 last year.
Since then, evidence has strengthened that stress is growing in the US casualty market, with more business flows into E&S, even tighter controls on limits and an increasing amount of data points flagging accelerating rate rises.
Reinsurance sources across the underwriting and broking divide believe rates have momentum, with some pointing to expectations that rate rises could exceed 20% in some excess casualty portfolios in 2025 – acknowledging the massively disparate nature of the casualty market will result in a wide dispersion of outcomes. One reinsurance underwriting source said their clients are showing clear month-on-month acceleration, pointing to real momentum.
Some believe rates could even rise beyond this level, and argue that multiple years of these kinds of rate gains are possible given loss trends and a broad conviction a catch-up period is needed.
The consensus until this year was that the casualty market had done enough work during 2019-21 through rate, limit compression and broader re-underwriting to return casualty portfolios to health. Sources believed these years could trend to the low-50s or high-40s for ultimate loss ratios – generating strong underwriting returns.
If 2020 proves to be a kind of false dawn, as seems increasingly likely, then there is a case to be made that 2025 onwards is when to grow. With scope for broad-based rate acceleration that would outpace even the more pessimistic assumptions on loss costs, and other carriers looking fearful, counter-cyclical underwriters may see an opportunity they look to seize.
The first phase of the casualty correction saw the heavy lifting take place in the primary market and, given the market’s reliance on proportional reinsurance, it seems likely that the most important drivers of improved economics will again come from insurers themselves.
3) How will talk of increased talk demand play out?
If you pretty much can’t believe anything anyone says about rates at Monte Carlo, it is also true that extreme scepticism should be directed to early indications on demand, because they often evaporate on contact with market realities.
Sources have pointed towards early indications from clients that they would look to push cession percentages higher on quota shares. Reinsurers are likely to see this as a lever to push ceding commissions lower.
A more concrete sign of new demand however is the several deals coming to the subscription market as cedants look to rework deals previously placed with Swiss Re direct, after the reinsurer has been cutting back in US casualty.
4) How serious are reinsurers when they talk up client differentiation and a laser focus on claims capabilities?
One of the most consistent messages of the conference has been that reinsurers want more information from cedants to allow them to appropriately differentiate by clients. Client choice is central in casualty where perhaps 15 points separate ceding commissions, but loss ratios can span the best part of 100 points.
As always, they are looking for aggressive rate-taking, tight control of limits, savvy management of accumulations, and careful avoidance of particularly problematical areas. But they also are increasingly interested in looking under the hood in claims.
Reinsurance underwriting sources said they wanted to see investment in claims infrastructure. They were looking for the hiring of in-house counsel, and spend on more expensive external counsel. They are looking for a fast feedback loop between underwriters and claims. Others talked about differentiating by subrogation rates, or adding claims audits alongside underwriting audits, which are only done by isolated reinsurers currently.
This sounds good, but claims has always been the poor relation of underwriting. These could be talking points only.
5) Has reinsurers’ resolve around driving ceding commissions lower changed materially from six to 12 months ago?
Through conference season last year, reinsurers also moved the spotlight to casualty, with Insurance Insider US saying the claims fear index spiked.
However, ultimately there were only modest improvements on ceding commissions, not the ~2 points that were frequently discussed, as reinsurers proved reluctant to give up business over a point or two of disputed cede.
The rhetoric has been amped up a little, and investor scrutiny of casualty performance is higher than a year ago, but reinsurers have form in staking out strong positions, only to give way in order to retain top line.
To date, 2024 renewals have shown few signs reinsurers are willing to throw clients over the side of the boat to buoy profitability.
6) Are reinsurers just running a very skilled game of misdirection by talking incessantly about the state of the US casualty market to protect cat margins?
Reinsurers are running 25%-30% RoEs on cat treaty books assuming average loss loads, and have taken themselves out of much of the noise by raising occurrence attachment points, pulling agg limit and restricting quota-share coverage.
While cat treaties have largely been running clean, insurers have been getting relatively beaten up by a series of severe convective storms, floods, and wildfires.
With fat rates, favourable structures and prospect of more demand at extreme return periods, cynics may argue reinsurers have very little to gain from attention being focused on cat reinsurance.
That might be to unfairly accord “evil genius” status to reinsurers, but Monte Carlo is in part a fight to set the frame through which the reinsurance ecosystem views the renewal. They can perhaps be forgiven for fighting hard, given how much is at stake.
7) How will it all end, or how much bad news would you need to break the US casualty market?
The underlying factors driving social inflation, and the sheer capitalist logic of litigation financing, suggest the dynamics driving claims will remain unchanged.
Some in the industry talk about the deus ex machina of widespread tort reform, but the catalyst for this kind of change would have to be market breakdown, along the lines of the casualty crisis of 1986/87 that left uninsured businesses unable to operate.
It is unclear how much more bad news would be needed to prompt a wholesale reassessment of casualty appetite. However, some reinsurance underwriting sources believe that if the 2021-23 accident years ultimately run into heavy losses, it could shift the calculus for some (re)insurers, prompting withdrawals or radical pullbacks.
Any (re)insurers slashing exposures or backing away from the class would, of course, miss the second correction, but you could see carriers judging there is just no way to be sure you have the ground beneath your feet in US casualty – and that they can’t take another Wile E Coyote moment.