Reinsurers take a wait-and-see approach in US casualty quota share renewals
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Reinsurers take a wait-and-see approach in US casualty quota share renewals

Despite reserving actions, there are no signs of reinsurance capacity shortages in the market.

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Reinsurers are exerting “extreme caution” on casualty cedants’ loss development but are not taking dramatic action on ceding commissions for mid-year renewals, sources told this publication.

While the extent of reserve developments is causing unease, sources indicate that reinsurers are on a “wait and see approach” instead of taking decisive measures on their casualty books, as primary rates continue to increase and interest rates are stronger than ever.

Ceding commissions are now largely in the high 20% to early 30% range, according to sources canvassed by this publication. This is lower compared to 2021-2022 when the figures peaked to mid-30s or more, but merely represents a small movement to where it was last year.

This comes despite a series of reserve charges which collectively exceeded $1bn in Q4 2023 disclosures, primarily driven by development in general liability from accident years 2019 and prior.

Reserving movements in Q1 2024 were not as pronounced, but P&C executives have further expressed concerns in the uncertainty of casualty loss development.

The Insurance Insider US research team’s analysis of Q1 stat data also showed that general liability trends continue to be worrying, being the only line of business which showed the industry's loss ratio deteriorating year-on-year.

US-P&C-industry-loss-ratios-by-LOBs.png

During fall 2023 conferences, European reinsurers such as Swiss Re put forward the narrative that ceding commissions should be corrected at large, citing a resurgence in claims.

But that posturing didn’t fully materialize into significant change in terms and conditions on January 1 treaty renewals.

Despite the Q4 2024 disclosures adding proof to reinsurers’ concerns, ceding commissions for major general liability and umbrella treaties have not fallen beyond 1 point this year, sources say.

Overall, capacity remains stable in US casualty reinsurance and more than enough to satisfy demand, although there are mixed views on the degree of oversupply compared to last year.

Carriers are largely holding their line, sources say, although it is difficult to draw a uniform brush as their strategies are diverging according to their legacy book and portfolio.

Sources added that some reinsurers have cut back but not to a degree of creating a void that is impacting the market. However, one source suggested that some markets are reducing their maximum line sizes by more than 50%.

The drivers of the general stability are the ongoing underlying rate gains, as well as high interest rates that benefit long-tail lines.

Business line outcomes

As a frequent target of claims litigation, commercial auto is hard to place. According to CIAB’s Q1 P&C market survey, the number of brokers that report an increase in commercial auto claims has steadily increased since Q1 2023, from 49% to 63% in Q1 2024.

Most reinsurers don’t provide monoline coverage for commercial auto, but general liability and umbrella treaties packaged with auto components are facing struggles to secure protection.

In contrast, ceding commissions for professional lines and cyber have taken a change of course. In 2023, ceding commissions for professional lines were falling by 2-3 points, led by a steep decline in primary rates for public D&O.

This year, the movement in the sector is more flat, or down around 1.5 points, sources say.

This is driven by the fact that primary rates are dropping less this year, the business is still profitable, and reinsurers are now happier with where the ceding commissions are, after making the cuts last year.

Cyber reinsurance is where the competition has heated up, with ceding commissions creeping up by 2-3 points this year.

Sources say this is driven by some major cedants reducing their quota shares this year, combined with a widespread belief that there is still margin to take, despite the decline in primary cyber rates.

XoL rates increase

For US excess of loss casualty (XoL) treaties, mostly placed in London, carriers are pushing to secure rate increases, which marks the fourth year in a row in which reinsurers have steadily upped their pricing on US XoL casualty business.

Broadly, sources expect rate increases on US XoL treaty to continue for 2024 at least, if not well into 2025, as similar concerns around the impact of inflation – both social and economic – continue to drive pricing discipline.

But overall, capacity for US casualty risk is seen as generally ample in this space as well.

The increases are not expected to be large, with some sources placing these between 5-10% on most portfolios.

Partly, the improvement of the past few years is due to improvements on primary casualty books. Loss experience and steadily tightening reinsurance conditions have pushed cedants to reduce line sizes or even withdraw from some casualty lines altogether.

“This is the opposite of what we were hearing five years ago, when people said ‘you need a $50mn line to compete in [the primary] market’,” one source said.

While XoL business does not have as tangible a link to rate increases on underlying business, sources said they expect reinsurers to benefit from a blend of improved underlying portfolios and additional reinsurance pricing.

Overall, sources described a reasonably well-balanced market for US casualty XoL written in London, in which rates are now keeping pace with loss trends and adequate capacity means cedants are able to fill programmes in an orderly fashion.

Cedants are, however, forced to seek out capacity from a greater number of reinsurers than previously needed as capacity has become more disciplined.

The underlying business mix covered by casualty treaties varies greatly, which naturally will lead to different outcomes for cedants writing in underperforming lines.

US general liability, because of the impact of social inflation, has dominated discussions, but sources also identified hospital liability as an area that will experience significant hardening at this renewal as a result of the way litigation funding organisations have targeted the sector.

Mitigating fear

Across the board, the fear of nuclear verdicts and claims litigation persists in US casualty.

A recent study from research firm Marathon Strategies, for instance, showed that the number of nuclear verdicts, or jury awards of more than $10mn hit 89 in 2023, a year-on-year increase of 27% and 15-year high.

However, sources say cedants’ reserving challenges haven’t been severe enough for reinsurers to collectively walk away from casualty.

“They don’t think now is the time to shrink their casualty business,” a broker source said.

For one, the vast majority of reserving actions booked in Q4 2024 stems from underpricing during accident years 2019 and prior. “That doesn’t speak to today, but decisions in 2016 to 2019,” one underwriter said.

There is some acceptance of the view put forward by cedants who claim confidence in their casualty books from accident years 2020 and onwards, when the industry embarked on a rapid hardening phase of rate-taking and limit compression.

The pace of primary rate increases has slowed down in the last year or so, but it is still rising on top of what was earned during the recent hard market years. In excess casualty, rates are going up in the teens range and cedants are also showing more willingness to push rate, as was echoed in Q1 calls.

Given these improvements, reinsurers are buying cedants’ argument that AY 2020-2023 won’t be as bad as 2019 and prior.

But whether the rate being taken now is enough to exceed loss trends remains a question mark.

It won’t be until the recent accident years start developing claims that the industry will get a sense of how adequately priced they are.

However, reinsurer sources say it won’t be easy to make a decisive call to shed market share in casualty, unless those long-tail losses actually start making a scratch on their books. It is particularly difficult given interest rates are still at a high and primary rates are still increasing.

“Some say ‘no I’m out’, others will say we’ll take creative actions and deal with [recent accident years] when we have to,” one senior executive said.

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