Casualty insurers brace for tough negotiations: Brit

US casualty’s woes are well documented. Almost every reinsurer is ready to bemoan the numerous challenges as they shape the narrative to support a further hardening of these lines of business by 1/1. But the dynamic of how negotiations will play out, and which reinsurers will be more or less present at January 1, have yet to be established.

“US casualty is not universally bad, but it’s certainly universally challenged,” Simon Bird, Brit’s group executive underwriter and active underwriter for syndicate 2988, told Baden-Baden Today. But reinsurers may have reason to suspect that the re-underwriting seen since 2019 has still fallen short of the bar.

Bird’s suspicion is that the bigger reinsurers are in sufficiently deep—in their own books and their own rhetoric—that changes will have to be made. Especially where primary excess casualty hits proportional reinsurance “there will be a lot of brinkmanship”. His hope is it can all happen without undue disruption or lumping all cedants into a single heap.

“You hope that it will be case by case and that one size doesn’t fit all.” Bird said. “You can’t tar everyone with the same brush. With some luck, there will be cases where a reasonable adjustment of the ceding commission is all that is required.” 

Reserve problem

The market’s big names face a tough dilemma. The reserve shortfalls might not be just in the 2014–2019 books that first raised suspicions, but in the 2020–2022 books as well. Big long-term players, already deep in the segment, could want meaningful compensatory premium more than a retreat from certain lines.

“You can’t win by adjusting ceding commission alone here.”

“The big traditional reinsurers are banging the drum. Some are saying the way they’ll have to correct this will be to take a bit of a sword to their book,” Bird said.

Given the nature of the problems and the structure of the market, easy options are few. 

Inflation—both social and economic—means that excess casualty tower retentions are now much smaller in real terms. Quota share of an excess casualty book is attaching much lower in real dollar terms. Deductibles have looked too stable too long.

“You can’t win by adjusting ceding commission alone here,” Bird said. “If you require a corrective 10 to 15 percentage points in pricing and you write pro rata, you can’t reduce the ceding commission by those sorts of amounts.

“If reinsurers see a combination of still-suspect pricing and a lack of correction on the primary market, it could make perfect economic sense to cut back your share on quota share business.”

Some better-performing cedants may remain unaffected, if able to demonstrate what sets them apart. “Client selection and buyer-seller underwriting relationships can carry the day: if they are strong and if the reinsurers understand what the primary insurer is trying to achieve,” Bird said.

“There will be cases where a modest tweak of the cede would be all that is required.”

To date, the talk in casualty has maintained a rather civil tone. “We have gone through a relatively well-behaved casualty crisis with primary insurers realising just how much remediation of their books required,” Bird said.

“A rising realisation that re-underwriting efforts to date have left books still struggling for profitability may add a new dimension. There are going to be some very tough negotiations on the path to 1/1,” he concluded .

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