Signs of further reinsurer retrenchment in US casualty as loss trend concerns mount

Some Bermudian and other reinsurers that have grown in US casualty in recent years to take up the slack left by the pullback of continental reinsurers appear to be signalling reduced appetite for the business ahead of 1.1.

Multiple sources have told The Insurer that management at several faster-growing reinsurers have communicated to brokers in recent weeks that they will be looking to halt their expansion or even cut back their writings at upcoming renewals.

This is likely to add pressure for excess-of-loss rate increases – particularly for underlying challenged classes like excess and umbrella casualty.

It will also support reinsurer moves to seek further reductions in ceding commissions on US casualty quota shares at a time when cedants are less likely to respond by retaining significantly more of the business net, given their own concerns about the health of underlying portfolios.

The driver – in line with the broader concerns consuming the sector – is the continued emergence of worrying loss cost trends, including on the more recent years that should have benefited from the hard market conditions in the US casualty insurance market that began back in 2019.

While nuclear verdicts in classes such as commercial have driven the headlines – along with some of the high-profile excess casualty claims in the market – multiple sources have said that the bigger emerging concern has been the more run-of-the-mill small to mid-sized claims that are seeing dramatic inflation in quantum.

The continued growth of the litigation financing industry is also raising fears around the trajectory of loss costs.

Reinsurers are also pointing to anecdotal concerns that some insurers may have been more optimistically reserving or releasing from reserves for the most recent years as they add to older years.

Big reinsurers have retrenched

Swiss Re and Munich Re have been vocal in their concerns about US casualty in the last few years, with the former adding $650mn to its reserves for the business in the first half of this year.

That added to around $2bn of strengthening in 2023, while other reinsurers that have significantly strengthened their US casualty reserves in the last 18 months include PartnerRe and Axis.

While the likes of Swiss Re, Munich Re and Scor have meaningfully reined in their exposure to US casualty business, others, such as RenaissanceRe, Arch and new player Conduit Re, have grown in the segment.

One reinsurance buyer told this publication that on their company’s US casualty placement, the composition of the panel had changed significantly last year as a result of retrenchment from some of the larger players that had dominated the placement.

“You have to replace that capacity. In general people were able to maintain their reinsurance capacity, but the tower composition changed a lot, and I think that sets the stage for another step. Once you cut back your participation one year, it makes it a lot easier the next year to cut back more,” they commented.

Another cedant noted that the current picture on the supply side looks different from the usual posturing in the lead-up to the renewal.

“When you start hearing major markets talking about cutting their portfolios by 25 percent that’s different, because they’re no longer chasing revenue… we’ve seen the emails… and [these reinsurers] have also spent an entire year digging into this,” they said.

The topic of US casualty was once again dominant at the Monte Carlo Rendez-Vous last month.

And several reinsurance executives expressed their concerns about the underlying insurance business, even as there appears to be a re-hardening of rates across a number of US casualty classes – most notable in areas like excess/umbrella.

Hannover Re CEO Jean-Jacques Henchoz said that further correction is needed in US casualty insurance business to keep pace with loss cost trends.

“For casualty, we are comfortable with the portfolio we have in the US but we are relatively defensive in that space. We have shied away from higher excess layers on exposed treaties with Fortune 1000 companies.

“And we are cautious on any commercial auto and pharmaceutical exposures. The latest price corrections are insufficient for us to grow or re-enter these markets in 2025,” he commented.

Meanwhile, Munich Re management board member Stefan Golling said the industry had been “too optimistic” on casualty claims trends, both for underlying claims inflation and what he described as “legal system abuse”.

He said that analysis of renewal submissions on excess casualty business showed that the market reacted to any crisis with strong rate increases, then consistently let these rates slip behind exposure trends.

“We cannot continue like that. We need to stop fooling ourselves about rate increases,” said the Munich Re executive.

He said July renewals had seen reinsurers celebrating nominal rate increases of 8-10 percent when claims trends were up 10-12 percent.

Meanwhile, writing in this publication, TransRe’s global portfolio leader for traditional casualty Keith Trigg said: “As 2015-2019 continues to deteriorate and 2020-2023 starts to disappoint, we can argue about the causes – but the effects are clear, and changes must accelerate.”

He suggested the only cure for “good old-fashioned under-pricing” is “good old-fashioned underwriting discipline”.

Cedant differentiation

In this environment, broking and underwriting sources have highlighted the importance of differentiation. Insurers who are perceived as having taken the right steps to tackle challenges such as legal system abuse, and are also achieving rate ahead of trend, are likely to get much better terms.

Aon Reinsurance Solutions global product leader Amanda Lyons said she believes reinsurers have already somewhat priced in the adverse development of reserves which cedants experienced in the last years of the soft market.

“But now we’re seeing a huge focus on differentiation. Many clients made significant changes around 2019-2020, reducing limits and tightening terms, so we’ll focus on highlighting those changes during renewals.

“The other key point is the importance of broader trading relationships, especially as reinsurers are now more focused on casualty, which will mean they have to continue to build holistic partnerships with their clients in this renewal period,” she commented.

Ceding commissions on US casualty (and professional liability) quota shares had marched up in the soft market years to a peak of the mid-30s.

However, those have been moving down incrementally over the last few years, with negotiations around the level of commission factoring in the trajectory of underlying pricing, the performance of the book, and any leverage a cedant might bring to bear over its ability to retain more of the business net.

The individual account picture may be quite different from the sector view, however, with a meaningful amount of differentiation based on the characteristics of the account and the relationship between cedant and reinsurer.

Sources have noted that where a reinsurer is a long-term strategic partner of a large cedant, it may be able to significantly lower a cede commission on an underperforming book in return for maintaining its participation and partnership.