Casualty negotiations to be tense in run up to 1/1: Fitch

There’s no referee able to stand between US casualty primary carriers and their increasingly nervous treaty reinsurers as sides line up to clash on the road to 1/1 renewals over the health of the segment and the adequacy of its reserves. Supply and demand will ultimately determine results deal by deal—and in some cases neither may be happy with the outcome.

So suggests Jim Auden, Fitch’s managing director for North American non-life insurance, and an expert analyst when it comes to the statutory numbers defining the segment’s health.

Long-tail lines can leave plenty of wriggle room for sides to disagree over the latest direction in trends. A vast array of slippery drivers at play—from economic inflation to COVID-19 pandemic court delays, to social inflation and its litigation drivers to the still latent impact of any recent changes in underwriting—give all sides what they believe could be the upper hand. The road to 1/1 could be contentious.

“Loss costs have definitely been rising, more significantly than in the past,” Auden told APCIA Today of his easy read on the macro top-down factors at play. “But what is the trend going forward? That is still a question,” he said.  

Primary insurers have been “fully aware” of some of the challenges for some time. They have been vocal where they feel those issues require regulatory action. But public moaning over social inflation quickly turns to bragging when they sit down to treaty reinsurance negotiations as they argue they have long since re-underwritten business. 

“Reinsurers are asking for more granular information from cedants.”

“Companies have responded with pricing actions and with underwriting decisions, but it takes a while to get a grasp of how that flows through to what your experience is,” Auden said.

Many cedants argue that casualty woes are localised issues, focused inordinately on automotive lines, on large clients with appeal to litigators or on select litigious jurisdictions.

Reinsurers tend to argue the opposite. “Where reinsurers are not performing as well in a segment they use a broader brush, seeking rate across the book,” Auden said. “But they have to be discerning too.”

The biggest problems seem clearest in umbrella and excess, Auden notes. Commercial auto and “other liability” are “perennial money-losers”. “But the picture does vary by line as well,” Auden said in at least partial support of cedant suggestions that casualty woes are localised.

Take commercial auto, where losses date back more than a decade and continuing reserve inadequacies tell a clear tale. But it doesn’t mean that reinsurers can easily argue that business written in 2021 to 2023 is underpriced. Insurers say they adjusted pricing—the truth is that it is hard to tell. 

“The magnitude of any reserve deficiencies in 2021 to 2023 and in other liability looks hard to assess,” Auden said. 

Professional liability has held up somewhat better, but Auden finds it “surprising that things aren’t deteriorating there yet”. “D&O and cyber look pretty profitable despite rates trending down after prior hardening,” he said.

No line is safe

Reinsurers have already signalled an intent to retort with a more blanket assertion that the problems have grown pretty far from their roots and that no particular space in the segment is safe.

As Axel Freiboth, managing director for North American treaty business at Hannover Re, said in an interview with this publication yesterday (October 7): “It is not that just one or two lines of business are particularly impacted, it is a general trend for higher loss costs,” Freiboth said.

Auden sees both sides of the debate. “I don’t think it is an unbounded problem,” he said. “But you see more attorney involvement in claims in all these segments; that leads to higher settlements and even nuclear verdicts.

“You don’t see a catalyst for that changing in the near term.”

In a September 16 statement titled “Reinsurers to Push for Double-Digit US Casualty Price Increases” Fitch stated, as the title suggests, that reinsurers would push for double-digit increases in US casualty premium rates when policies come up for renewal in January 2025. 

It noted that reinsurers do not believe this year’s US casualty price rises have been sufficient. At the mid-2024 renewals, rates increased by up to 15 percent for loss-affected accounts and up to 10 percent for no-loss accounts. 

Some reinsurers are taking more direct action. Munich and Swiss Re, in particular, have significantly reduced their exposures. Reinsurers are asking for more granular information from cedants as they tighten their risk selection, Fitch said.

Several reinsurers have reported adverse reserve developments. Swiss Re added $650 million to its US casualty reserves in 1H24, following a $2 billion addition in 2023. PartnerRe also significantly strengthened its US casualty reserves in 1H24, and Axis booked a $425 million reserve charge in 4Q23.

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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