Remain vigilant to ‘nuclear’ threat of rising loss costs: Hannover Re boss

The word “nuclear” used in relation to US casualty business has long outgrown its original meaning defining individual jury verdicts. Today it may better characterise the multiple, interlinked challenges that now extend into every corner of the market driving up loss costs. No line of business can be considered safe.

That might summarise the views of Axel Freiboth, managing director for North American treaty business at Hannover Re, whose underwriting team attending this event in Chicago remain highly vigilant to casualty’s woes, to property’s expanding threats—and to any risk that such issues are being downplayed.

“Any line of business needs to be considered a target.”

“It is not that just one or two lines of business are particularly impacted, it is a general trend for higher loss costs,” Freiboth told APCIA Today.

“Any line of business needs to be considered a target,” he said. “Well-documented lines of business such as commercial trucking or excess casualty have been standing out with substandard performance for years, but the overall problems are wider and deeper.”

Freiboth is clear on his stance on a debate where sides can have conflicting positions, and in which, especially on long-tail portfolios, there can be room for interpretation.

Some insurance CEOs, when challenged on earnings calls on US casualty lines and related reserve adequacies, tend to suggest the problems are localised by line of business. Some reduce the issue to “anything on wheels” or blame the growing litigation financing industry. 

Others suggest the issues lie in specific jurisdictions that are highly litigious. Tricky questions around reserve top-ups are sometimes deflected as “old news”.

But Freiboth, reflecting the tone of other big reinsurers, is not ready to underwrite risks which have been brushed under any carpets. “Further action is needed in the upcoming reinsurance renewals,” he said. 

With an ever-growing list of carriers which have increased their reserves during the first half of 2024, “there is much more urgency connected to this matter,” Freiboth said.

“The inflationary trends, economic but also social inflation, in combination with litigation financing and legal system abuse have led to clear increases in the loss costs for essentially all liability lines,” he said. “There will be a lot more discussions on casualty portfolios as we near the renewal dates.”

How to respond

Hannover Re will respond by seeking limit management or limit compression, exclusions for wider liability exposures such as polyfluoroalkyl substances (PFAS, now responsible for a growing number of claims) or microplastics. It will also look carefully at heavy exposures and drill down into things such as fleet size, radius and composition. These are what Freiboth calls “some of the aspects that need to be discussed”.

Likewise, he is sensitive to jurisdiction. “The location of risks makes a difference,” he said. “Those who thought that only certain jurisdictions would be impacted are currently learning that this is not the case.

“Mega-million verdicts can now be found across the entire country, so it is an issue for everyone. In casualty lines, we have reached the level of urgency to act.”

It is not that insurers have not been trying to get a handle on these problems. But the types of remediation cedants have already put in place might not provide the level of protection they hoped for.  

For example, where cedants have reduced their exposure to nuclear verdicts by tightening policy limits, thus managing the severity better, they can still be unprepared for the frequency of claims. 

Freiboth notes that a rising frequency of claims and a host of attendant costs are just as problematic. “Many clients have reacted and managed limits down in the hopes of not being targeted,” he said. “However, the frequency of litigated claims appears to be steadily increasing, and litigation expenses alone add significantly to the costs of claims.” 

More adjustment needed

It is not only casualty business that concerns Freiboth: he is also cautious on property and property-cat business. The 2023 market reset was very much-needed, he said. After years of battered returns for reinsurers, reinsurers pushed through substantial rate gains and “significant increases” in attachment points, along with tightened terms and conditions.

But the evolution of natural catastrophe risks and portfolios means that further adjustments may still be necessary. “Unfortunately, we are not yet done with correcting the property business,” Freiboth said. 

“What happened in 2023 has helped, but ceding companies still need to continuously re-work their portfolios to manage their exposures better and refocus on loss prevention.”

Such concerns should keep the balance of supply and demand in check for the 1/1 renewals. Reinsurers will want to ensure support for rate and no major slippage on the newly tightened terms and conditions, Freiboth said.

“Helene was another reminder that there are huge values at risk.”

“While we are currently not seeing a shortage in capacity, there is at the same time no real inflow of new capital,” he said. “It’s an indication that the market has not yet fully returned to its healthy state.”

Learnings from the latest natural catastrophe seasons further those arguments, in Freiboth’s mind.

He said the hurricane season has been a clear reminder that wild cards remain forever in play. Hurricane Helene may have made landfall at a location which hurricanes Idalia and Debby proved to be a relatively innocuous path yet the storm caused the heaviest damage hundreds of miles away from the landfall site.  

“Helene was another reminder that there are huge values at risk and not only coastal properties are affected by such storms,” Freiboth said.

His attention, like that of all observers, was drawn inland, to major inland and river flooding some 400 miles north in the Carolinas or further into Tennessee, and to record storm surge flooding some 180 miles south-east of landfall in the Tampa area. “Significant damage was observed inland,” he said.

Likewise, he worries on the less-modelled perils. Severe convective storms are now the biggest loss generator in 2024 while wildfire losses remain “plentiful across the nation”, putting new territories under the microscope. 

All this should result in continued discipline, at the very least. “Even though reinsurers have shifted some of the loss burden back to the insurance carriers with higher attachment points, the overall state of the property market is still not sufficiently in the black to attract more capital,” he concluded. 

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

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