The global casualty insurance market has gone through a gradual process of self-correction, according to Chris Ross (pictured), managing director at Guy Carpenter, a global risk and reinsurance specialist and a business of Marsh McLennan.
Speaking at a recent virtual media briefing, Moving Forward, Ross said: “As we look across the key casualty lines of business today, we clearly see an insurance market that has corrected itself. Insurers and reinsurers are now positioning themselves to capitalise on what we believe will be a casualty market that generates meaningful margins for both insurers and reinsurers.
“Looking to the next phase of the market cycle, the reinsurance market has responded with reinvigorated product offerings that allow our clients to execute their plans from a position of strength and to set all parties up for success in the coming years.”
The casualty insurance industry has taken lots of corrective action in recent years – hardening significantly in reaction to deteriorating loss ratios across many casualty lines, most notably in commercial auto, general liability, umbrella and financial lines.
One of the primary causes of market hardening across casualty lines is social inflation – a term used by insurers to describe the rising costs of insurance claims resulting from things like increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions, and larger compensatory jury awards. This is particularly problematic in the US market, but similar trends can be seen in Australia and Europe.
“Rate [correction] is only part of the story as carriers implemented other significant changes to counter the social inflation dynamic,” said Ross. “The first are capacity reductions. A clear tool to control loss severity is to reduce capacity offered, and the insurance industry has done that, particularly in excess casualty and financial lines.
“Coupled with the improved pricing already outlined, overall portfolio rate on lines have improved markedly, particularly in high excess layers. Simply put, carriers are getting more premium per exposure unit now than they have in the past several years.”
Many carriers have also started to increase their insured retentions for loss-impacted casualty lines, and underwriters have started to adjust their risk appetites and pay more attention to latent, severe, and systemic exposures. At the same time, insurers are also using risk management services to improve their clients’ risk profiles and mitigate exposure to their bottom lines.
“The combined impact of all these actions has created positive momentum for the second half of 2021 into 2022,” Ross commented. “But concerns remain - and these concerns all point [to continued] market discipline for rate increases, and for additional focus on the underwriting strategies implemented to ensure continued profitability in 2022 and beyond.”
The past several years have also highlighted the need for solutions across casualty portfolios, according to Ross, who added that Guy Carpenter is “uniquely positioned” to help clients with this.
“The first action item is to identify and measure and manage casualty portfolio aggregation,” he said. “The multi-year nature of casualty accumulations can create pressure on both earnings and very severe events capital returns. Rating agencies and regulators are also putting increased focus on how carriers are navigating this environment.
“Guy Carpenter has proactively introduced portfolio tools and enhanced casualty modelling techniques that examine, track, and model casualty portfolio aggregation. Our tool suite when used in conjunction with our financial models, such as Benchmark, MetaRisk and MetaRisk Reserve, give us unique insights to designing and implementing both legacy transactions to protect prior accident years, and go-forward solutions for maximising retain risk and profit while ceding unwanted volatility.”
Examining different reinsurance structures, such as adverse development covers and loss portfolio transfers, on the go-forward portfolio is “invaluable,” said Ross, for ensuring that profit opportunities are seized, while providing sufficient volatility protection.
“Lastly, we all know that we operate and execute these transactions within an ever-changing reinsurance marketplace,” Ross added. “Engagement between all parties has been remarkable during this unprecedented period. Heading into year-end renewals, we expect this positive momentum to continue and lead to an orderly renewal period with ample capacity to support cedents' reinsurance strategies.
“Reinsurers will continue to focus on prior-year loss development, but by placing increased focus on the rate increases achieved to date, outlining profit expectations for 2022, and highlighting the evidence of underwriting risk management actions, cedents will be best positioned for favourable outcomes. Linking reinsurance strategy to business success is ever more critical. And that focus is shaping the market evolution and our ongoing response.”