Q4 casualty reserve strengthening balloons to $1bn+
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Q4 casualty reserve strengthening balloons to $1bn+

Is this a temporary spike or the start of a multi-quarter trend?

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The Q4 2023 earnings season has yet to come to an end, but it’s already looking like P&C insurers’ reserve strengthening in the casualty segment has surpassed $1bn on an industry-wide level.

Previously, this publication had examined the cautious tone of P&C insurance executives regarding the US casualty business across general and professional liability lines regarding accident years 2019 and prior.

The analysis back then was based on a handful of early reporting companies, including Axis which kicked off the narrative with a $425mn reserve charge in a preliminary announcement.

In the past few weeks, more P&C carriers have followed suit, attributing unfavorable reserve development to their general liability books – albeit the degree has varied per company according to the mitigation effect from reserving in other lines of business, most notably workers’ compensation.

In an effort to capture the industry-wide scope of these adjustments, Insurance Insider US has compiled (re)insurers’ reserve disclosures for Q4 2023 with a focus on casualty, based on financial statements and executives’ commentary.

Personal lines-focused carriers were excluded. Carriers in the table represent the group where we were able to find reserve charges specifically related to casualty lines, whereas those added in the footnotes provided the net number without breaking it down by segments.

The aggregate is a rough estimate, but based on the data we have so far, it seems that the P&C industry has added around $1bn in prior year casualty reserves during the quarter, despite the ongoing favorable development in workers’ compensation.

In effect, this suggests that reserve strengthening for general and professional lines that are potentially directly impacted by nuclear verdicts may easily surpass the $1bn mark.

Latency is the killer

Commentary surrounding the drivers of the reserve charges have been similar to early reporters: they mostly stem from losses with increased severity between accident years 2015 to 2019, more so in general liability than professional lines, especially in areas that are prone to what executives have termed social inflation.

While the effect of social inflation on loss costs is not new to P&C executives, some of them have noted during calls that general liability severity during the period in question is emerging higher than expected.

In particular, several executives have called out longer development patterns affecting severity.

“Reporting of these claims has lagged historical development patterns due to the effects of court closures and claim backlogs, stemming from the Covid pandemic, aggressive tactics by the plaintiffs' bar and slow claim reporting trends,” said Jeremy Noble, Markel’s president of insurance.

By nature, casualty is a long tail business. But the backlog of US court cases spurred by the Covid-19 pandemic elongated the tail of claims processes by another few years, which makes losses more expensive, but is now also compounded by the impact of core inflation.

What is mitigating the loss impact of general liability is workers’ compensation, a line of business which has historically contributed to offsetting adverse developments from other segments.

But several executives have suggested in recent calls that market conditions are turning less favorable due to medical inflation.

“There's going to be some slight pressure on comp. And we're going to try to maintain and expand margins where possible in other lines of business,” said The Hartford CEO Chris Swift.

In a recent note on casualty loss reserves, Insurance Insider US’s research team pointed out that if longer-term loss cost inflation worsens, some of the releases we’re seeing right now may be premature.

Recent accident years

Some executives have expressed confidence that the fourth-quarter reserve charge will be enough to incorporate the surprise factor from the post-Covid years.

“We believe the balance sheet moves we made this quarter have closed the book on the 2016 to 2019 reserves and put us in very good shape to generate leading returns in the years ahead,”said Everest Group CFO Mark Kociancic, after the Bermudian booked $392mn of adverse reserve development in Q4 2023.

That being said, carriers generally express more confidence in their casualty books for recent accident years, after the market embarked on a rapid multi-year remediation of rate increases and limit cuts starting in 2020.

Reflecting that confidence, some carriers have released reserves for accident years 2020-2022.

In a move defying its peers, Markel added reserves to its 2021 and 2022 accident years in the fourth quarter, in addition to adjusting its 2023 accident year attritional loss ratios at the beginning of 2024.

Behind those decisions was a recognition that “the ultimate cost to settle the claims on more recent years may prove to be higher than we initially anticipated,” president Noble added.

More broadly, the executive touched on the challenges with regards to social inflation – such as the prevalence of litigation funding and aggressiveness of plaintiffs for juries’ sentiments – which he says there is no “reason to believe that that abates anytime in the near term”.

That statement shows that the uncertainty surrounding social inflation is certainly not confined to the years of 2019 and prior. The question becomes, can the reserve strengthening in GL be capped at Q4 2023, or is this the start of a multi-quarter trend?

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