Reinsurers eye US casualty rate hikes citing higher loss costs: Fitch

Reinsurers are likely to push for double-digit increases in US casualty premium rates when policies come up for renewal in January 2025 to keep up with higher loss costs, Fitch Ratings said in a September 16 statement. Adverse loss development trends in US casualty business due to higher social inflation is a key risk to its ‘neutral’ global reinsurance sector outlook, the rating agency said.

“We anticipate tough negotiations with cedants as 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. 

“In addition to further increases in January 2025, we expect cover limits and quota-share commissions to be reduced,” Fitch said.

It stated that reinsurers’ concerns that market prices are too low is leading them to prune their exposure and limit capacity in the lines of business most affected by adverse loss development. Munich and Swiss Re, in particular, have significantly reduced their exposure, Fitch noted.

“Reinsurers are asking for more granular information from cedants as they tighten their risk selection. Meanwhile, demand from cedants is increasing, leading to a widening supply and demand gap and adding to the upward pressure on pricing.”

Rising loss costs

Fitch said it expects loss costs to continue rising in 2025 due to social inflation and US legal system abuse. More frequent verdicts that exceed payouts of $10 million, a higher proportion of claims with attorney involvement, and evolution of the litigation funding industry will add to the trend. 

Latent liability risks from opioids, microplastics and synthetic chemical substances known as PFAS pose considerable challenges and uncertainty for casualty reinsurers, Fitch said.

US tort reform, which could help to reverse the increasing loss trend, does not seem to be a public policy priority in the near term. 

“Recent reserve additions have been partly out of necessity.”

“There is a risk that social inflation expands beyond the US to common law countries, such as the UK, or to Canada and Australia, where tort law is based on precedent. Countries governed by civil law, such as France and Germany, are less at risk, largely due to the involvement of judges, and caps on damages,” said Fitch.

It pointed out that 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 significantly strengthened its US casualty reserves in 1H24, and Axis booked a $425 million reserve charge in 4Q23.

“We believe recent reserve additions have been partly out of necessity, but in some cases also pre-emptive and opportunistic, with reinsurers taking advantage of a strong underwriting period for property reinsurance. 

“Reserve redundancies in workers’ compensation and property lines have greatly offset deficiencies in the most exposed lines, including general liability and commercial auto.”

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

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