Reinsurers Prepare for Rate Hikes Amid Rising U.S. Casualty Loss Costs

Reinsurers are likely to push for double-digit increases in U.S. casualty premium rates during the January 2025 reinsurance renewals. This move aims to address higher loss costs. Rising social inflation in the U.S. casualty sector remains a major risk, keeping the global reinsurance sector outlook neutral. Beinsure analyzed the report and highlighted the key points.

We expect loss costs to continue rising in 2025 due to social inflation and U.S. legal system abuse. More frequent verdicts that exceed payouts of $10 mn, 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, according to Fitch Ratings.

For 2024, a significant proportion of insured losses stemming from hurricanes Milton and Helene are likely to be transferred to the global reinsurance market. However, stricter reinsurance terms and conditions, which led to higher attachment points, also should help make reinsurers’ losses manageable.

Given the nature of the investment allocations over time and risk profiles, as well as the fact that companies’ actions to earn higher interest rates generally have a limited impact on investment income, analysts continues to see underwriting profitability as the essential in the composite’s operating performance assessments and analysis.

Q4 2024 reinsurers’ results will be negatively affected, but full-year earnings should still be favorable. Further reinsurance market hardening is unlikely, but Helene and Milton will probably stall any softening of the market cycle

AM Best expects ROEs to continue to exceed the cost of capital over the medium term, as new capital seeks enterprises with established track records or with the liquidity of the insurance-linked securities market, which provides investors quicker entry and exit points in the reinsurance industry.

Reinsurers Claim 2024 U.S. Casualty Price Increases Fall Short

The mid-year reinsurance renewals occurred against a continued increase in reinsurer appetite as overall reinsurance capacity grew. This uptick in capacity occurred against a backdrop of strong capital growth and robust reinsurer returns. In 2023, reinsurers in the Guy Carpenter Index added approximately $35 bn to traditional shareholders’ equity capital, according to Guy Carpenter’s Report.

In the weeks prior to June renewals and into July, there was a notable shift in global insurance-linked securities (ILS) supported offerings, creating somewhat tighter conditions than earlier in the spring.

Mid-year renewals reflected a transitioning reinsurance market meeting demand in a dynamic trading environment. Loss-free property programs saw easing of pricing, even as demand increased.

Casualty renewal outcomes varied by sublines as well as reinsurance type. General liability and excess/umbrella placements that are US exposed experienced continued reinsurance pricing pressure for excess of loss programs, while quota share outcomes were tied to the amount of adverse development.

Negotiations with cedants will likely be challenging. Reinsurers argue that the 2024 U.S. casualty price hikes have been insufficient.

At mid-2024 renewals, rates rose by up to 15% for loss-affected accounts and up to 10% for accounts without losses. Further increases are expected in January 2025, alongside reduced cover limits and lower quota-share commissions.

Concerns over low market pricing are driving reinsurers to reduce their exposure and limit capacity, particularly in lines heavily impacted by adverse loss development. Companies like Munich Re and Swiss Re have cut their exposure significantly.

Global Reinsurance Forecasts

Global property catastrophe reinsurance risk-adjusted rates at mid-year were generally flat to mid- to high-single digits.

In some cases, upper layers were risk-adjusted down 10% or more for non-loss impacted accounts. Pricing movement was heavily dependent on account specific factors including portfolio composition and historical pricing movement.

Renewal outcomes for casualty business reflected variation across sublines as well as reinsurance type.

General liability and excess/umbrella placements that are US exposed experienced continued pressure for increases in excess of loss pricing of +1% to +5% for better performing programs and +2.5% to +10% for those that were loss impacted.

On quota share, downward pressure on ceding commissions featured in the quoting process, however, as underlying casualty rates remained strong and above expectations, post-January 1 renewal outcomes stabilized to flat to -1 point.

Additionally, reinsurers are tightening risk selection and seeking more detailed data from cedants. However, demand from cedants is rising, widening the supply-demand gap and putting upward pressure on rates.

Efforts like U.S. tort reform could help control losses, but such initiatives are not a current public policy focus. There is also a risk of social inflation spreading to countries with common law systems, like the UK, Canada, and Australia.

Countries with civil law systems, such as France and Germany, face less risk due to judicial involvement and damage caps.

Reinsurers have disclosed adverse reserve developments recently

Several reinsurers have disclosed adverse reserve developments recently. Swiss Re added $650 mn to its U.S. casualty reserves in 1H24, following a $2 bn addition in 2023. PartnerRe and Axis also strengthened reserves significantly in 1H24 and 4Q23, respectively.

While some reserve increases are necessary, others are pre-emptive, with reinsurers capitalizing on favorable property reinsurance underwriting. Reserve redundancies in workers’ compensation and property lines have offset deficiencies in exposed areas like general liability and commercial auto.

U.S. liability insurance business from 2015-2019 accident years continues to show adverse loss development. Longer-tail excess liability and umbrella lines could see further reserve pressure.

There are also uncertainties about whether loss estimates for 2021-2023 accident years will be sufficient, as carriers set more conservative initial loss ratios and higher incurred-but-not-reported losses.

Despite expected challenges in U.S. casualty reserve experience through 2025, Fitch believes most reinsurers can manage necessary reserve strengthening without significant capital impact.

Reserve issues are not expected to create a scenario similar to the late 1990s and early 2000s when capital pressure led to negative ratings. Most companies should be able to absorb reserve adjustments through earnings.

FAQ

……………….

AUTHORS: Manuel Arrive, CFA – Director, Insurance at Fitch Ratings Ireland, Brian Schneider, CPA, CPCU, ARe – Senior Director, Insurance at Fitch Ratings, David Prowse – Senior Director at Fitch Wire