Unlike property reinsurance, most casualty lines of business were not capacity constrained at mid-year 2022, according to Guy Carpenter.
The corrective actions that casualty insurance carriers and reinsurers have taken in recent years have “contributed to a casualty sector that’s better positioned to weather the challenges of today,” said Carolyn Morley, managing director of global casualty at Guy Carpenter, “but renewal outcomes remain highly varied based on individual program dynamics.”
By “corrective actions,” Morley is referring to the cumulative rate increases that casualty carriers achieved – most notably in commercial auto, general liability, umbrella, and financial lines – as well as underwriters’ strategic alterations to risk appetite, coverage terms and conditions, limit and retention management, and risk management requirements.
Those actions “laid the foundation for more robust reinsurer engagement,” according to Morley, and have played a part in producing more favourable loss development.
“The impact of underwriting actions, together with the effects of the decrease in claims frequency, has today yielded a relatively positive result,” said Morley, reflecting on the mid-year 2022 state of the market. “Portfolio performance and growth plans have also made many lines attractive to reinsurers whose risk appetite has been shifting away from certain CAT segments or geographies.”
In August 2022, AM Best released a report, titled ‘Global Reinsurance: More Stable and Improved Results Following Shift from Property Catastrophe Risks,’ which details how many global reinsurers have altered their business mix away from property catastrophe risks towards casualty and specialty primary lines, which are deemed more attractive because they generate more stable, predictable loss patterns.
However, casualty and specialty lines are not immune from accumulation risk, as seen in major events such as the COVID-19 pandemic or the Ukraine invasion. There are also concerns around economic and social inflation, as Morley noted: “Reinsurers are increasingly concerned with external economic and political factors, and the resulting heightened volatility applying to both short- and long-tail lines.”
Operating in this volatile environment, casualty carriers and reinsurers will be focused on three things, according to Guy Carpenter. First, they’ll be focused on underwriting strategy and portfolio management, with pricing and risk selection remaining key considerations for insurers and reinsurers alike.
When assessing cedents during renewals, reinsurers want to clearly understand the carriers’ underwriting approach and any re-underwriting strategies that have been implemented. They’re also looking to quantify the impact of policy wording changes, use of risk management strategies, limit deployment, and general risk appetite.
They’ll also be focused on loss dynamics, keeping a close eye on both economic and social inflation, and watching out for any changes in frequency or severity. There have been some concerns around continued loss development on historical years. At the 2022 mid-year casualty reinsurance renewals, the market did see “a degree of loss development beyond original expectations” on some of the older years, Morley explained. This came in addition to “concerns regarding rising competition and the impact of inflation”.
Finally, reinsurers will be focused on their reserves, ensuring they’re poised to handle any developing and emerging risks, as well as loss inflation.
“Heading into January 1, we expect strategic trading relationships to continue to carry significant weight as the interest rate environment, Russia-Ukraine conflict, and inflationary recession concerns remain at the forefront of renewal discussions,” said Morley. “To guard against dynamic market forces, cedents and reinsurers will remain focused on underwriting approach, loss trends, and reserves.”
The Guy Carpenter leader said she expects casualty capacity to remain adequate and for the year-end reinsurance renewal cycle to be orderly as reinsurers remain stable and respond to individual client requirements. Following similar trends in 2021, Morley does expect there to be some pricing pressure, depending on the line of business and capital requirements.
“Cedents who proactively highlight their limits management, portfolio actions, and policy changes will be strongly positioned for successful renewal outcomes,” Morley emphasized. “Early and detailed strategic communication is especially crucial as reinsurers work to bring increased attention to the moderating underlying rate environment in many areas, and adhere to a closed view on actual versus expected loss development.”
