Mixed messages: challenges and opportunities at historic highs for casualty

On one hand, Tod Costikyan, chief underwriting officer of Markel Global Reinsurance, doesn’t share the bullishness of some who are encouraged by the return of the hard market. He is, at best, neutral. The market has improved, but the cost of capital remains elevated and previous years’ reserve development remains an issue, he told Monte Carlo Today. 

“This market turn feels a little different from past hard market cycles,” he said. It has persisted longer than previous markets but has also been less impactful. “It seems as though there is less potential upside of this hard market than some of the more dramatic market turns of the past.”

Among the causes are aggressive and well-funded plaintiffs firms driving litigation abuse, COVID-19 court closures, and core economic and social inflation. Globalisation is also exposing international enterprises to the US legal system. As a result, claims, loss trend and other data are more “opaque” so that past experience is a less reliable guide to the future than it has been, he said. 

“We need to look at where the majority of new capital in the industry has flowed,” said Costikyan. It’s been driven by growth in managing general agents (MGAs) with associated fronting companies, with much of the money flowing into consolidating the distribution system. 

“Resurgent MGAs can lead to a misalignment between the underwriting decision and the capital at risk,” he warned. 

At the same time, there’s been relatively little new traditional risk capital flowing in compared to previous cycles. “There’s no class of 2022, 2023 or 2024,” he noted. Established players are also significantly more cautious than the new entrants.  

“We’re seeing different behaviours between legacy players with deep historical data versus newer platforms. Some of the larger historical casualty reinsurers have continued to cut back their US casualty writings,” he said. 

“The risk barometer continues to push towards amber and red.”

All that is against the backdrop of a very uncertain world. 

“A year ago, there was one major land war in the world. Today, there are two. Approximately half of the world’s population has gone through an election cycle with some dubious electoral outcomes,” he said, adding that globally, the risk barometer “continues to push towards amber and red”.

Reasons to be cheerful

However, the glass is half-full for Costikyan. He sees as many opportunities as challenges on the horizon. 

One reason the hard market has persisted is that re/insurers have recognised and responded to back-year reserve development. “Despite earlier predictions that the pricing would flatten out in 2024, it has remained relatively robust,” he pointed out. 

At the same time, inflation has begun to come down, and there are encouraging signs that US states are recognising the damage that abusive litigation brings. Five states in the US have legislated on litigation funding, and another 11 have made moves to do so, even if they were, ultimately, unable to pass new laws.

Crucially, as well as beginning to address old problems, the industry has new opportunities. Technology, for instance, can allow insurers to work with clients to reduce risk. 

“The industry has a tremendous opportunity to help customers focus on loss mitigation as opposed to purely risk transfer after the event,” said Costikyan. That’s most clearly evident with cyber coverages, where insurers’ demands for insureds to fortify their defences are helping build a much more resilient client base.  

“The cost and availability of insurance is a huge enabler of better risk management and mitigation,” he said.

As cyber illustrates, it’s the biggest challenges the world faces that present insurers with some of the greatest opportunities. And perhaps none is greater than climate change and the move to achieve net zero emissions by 2050. 

“That target suggests a ‘green industrial revolution’ that will require trillions of spending over coming years and where insurance can and should play a central role,” Costikyan said. 

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“Insurance is the instrument that for 400 years has facilitated innovation and capital investment, allowing it to meet the headwinds of risk,” he pointed out. 

“Whether it’s investment in technology construction performance or insuring the infrastructure required for this transition, it is a huge opportunity for our industry for decades to come.”

Tod Costikyan is the chief underwriting officer of Markel Global Reinsurance. He can be contacted at: tod.costikyan@markel.com 

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