What’s happening with casualty reinsurance renewals?

The January reinsurance renewal season saw reinsurers maintaining sufficient capacity for casualty programs amid concerns over social inflation and the need for reserve strengthening, as revealed from the latest AM Best commentary.

The report, titled “Despite Heightened Risks, Casualty Reinsurance Renewals See Modest Price Changes,” highlights that reinsurers have kept a disciplined approach to underwriting, particularly in comparison to more volatile property covers. This discipline is also evident in the stability of attachment points and terms and conditions, which are not expected to ease in the near future.

While property catastrophe reinsurance has experienced several price hikes due to an increase in the frequency and severity of weather-related events, reinsurers have shown reluctance to increase capital allocations to these risks until they see more evidence of rate adequacy.

This cautious stance contrasts with the dynamics observed in casualty reinsurance, where reinsurers are carefully balancing their portfolios amid the challenges posed by long-tail risks such as general and commercial auto liability.

Impact of social inflation

The commentary points out that economic and social inflation trends, fueled in part by third-party litigation funding and sophisticated plaintiff attorney tactics, are driving up judgments and affecting lines like commercial auto, general liability, and directors & officers (D&O) liability insurance.

These factors contribute to a landscape where social inflation continues to exert upward pressure on loss costs, with third-party litigation funding delivering high returns uncorrelated to other financial assets.

The commentary also took note of the impact of social inflation on the insurance industry, particularly in sectors like commercial auto, where loss experience remains challenging. Despite consistent rate increases over the past decade, pricing has struggled to keep pace with escalating loss trends, further straining reinsurance pricing.

The analysis also touches on deteriorating driving behaviors since the onset of the COVID-19 pandemic, including increased road fatalities despite fewer miles driven, and the rise in distracted and impaired driving. These trends have led to more severe injuries and litigated claims, amplifying loss severity through punitive damages awarded by sympathetic juries.

This environment has resulted in higher costs for excess of loss reinsurance on individual claims and has challenged the commercial auto sector, which saw underwriting losses in 2022 reminiscent of the 2016-2019 period, with third-quarter 2023 results showing a continued decline.

What are your thoughts on this story? Please feel free to share your comments below.