Best’s Commentary: Despite Heightened Risks, Casualty Reinsurance Renewals See Modest Price Changes

Reinsurers generally maintained adequate capacity for casualty programs during the January reinsurance renewal season, despite concerns about social inflation and recent reserve strengthening actions, according to a new AM Best commentary.

The Best’s Commentary, “Despite Heightened Risks, Casualty Reinsurance Renewals See Modest Price Changes,” states that reinsurers also maintained underwriting discipline relative to volatile property covers, with attachment points, and terms and conditions unlikely to be relaxed any time soon.

More frequent and severe weather events have resulted in multiple price increases for property catastrophe reinsurance over the past few years. However, reinsurers remain hesitant to allocate more capital to these exposures until there are clearer indications that technical rate adequacy has been achieved.

The trade-off between property catastrophe reinsurance and casualty reinsurance was very much a factor during the latest renewal season, according to the report. Any shift toward reinsuring more casualty lines of business comes with its own exposure. “Casualty lines have been affected by economic and social inflation trends, given the long-tail nature of risks such as general and commercial auto liability, and insurers remain skeptical about future adverse loss reserve development in this segment,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best.

Third-party litigation funding in the United States continues to drive social inflation, with sophisticated plaintiff attorney tactics contributing to inflated judgments, according to the report. Industry estimates suggest that third-party litigation produces an internal rate of return of about 25% for the funding entity, which is generally greater than what can be obtained through traditional investments.

“If investors can achieve this return consistently, especially on investments generally uncorrelated to other financial assets, the practice will continue, driving up loss costs for insurers,” Graham said.

Over the past decade, commercial auto, general liability, and directors & officers (D&O) liability insurance have been notably affected by social inflation. Commercial auto loss experience continues to be poor. Increased loss severity and claim frequency have outpaced pricing increases for over a decade.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=340496.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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