Moving forward, one focal debate in the community is whether that sentiment will develop further into the year to result in re-acceleration of rates, especially in the lead excess layers as carriers brace themselves for the influx of nuclear verdicts that were dormant during US court backlogs.
In lead excess casualty layers, broking and carrier sources indicated rate increases of 10% and above – with 7% cited as the minimum threshold to keep ahead of the basic CPI inflation.
“In the first $25mn layers, the competition is far less than that in excess space,” said Ania Caruso, Gallagher’s southeast regional casualty practice leader.
On the contrary, higher excess layers that experienced an influx of new capacity and entrants in the past two years are seeing rate increases come down to the low single digit range. Some sources have suggested flat or declining rates in certain layers, although they are still relatively rare.
Opinions on current rate adequacy are mixed. Market insiders generally felt that pricing had reached rate adequacy by year end of 2022, sources say, apart from certain lines of business, most notably auto liability.
However, that positivity does not hold solid for 2023 outlooks, as underwriters are watching for how incurred-but-not-reported claims from 2020 and 2021 match up to severity expectations following the re-opening of the courts.
One source said the industry is in a “messy middle” as they wait for more information to come on a nine to 12-month lag.
“I just bristle a little bit when the overall narrative is ‘we've achieved rate adequacy’,” said another carrier executive. “That starts to make people think we're good now, we don't have to do anything else – that concerns me.”
Past a soft market
Behind that cautiousness is the memory of a decade-long soft market in the 2010s. The market started firming in 2019 with an industry-wide awakening to the threat of social inflation.
Market correction happened fast during the next two years - probably faster than expected, one underwriter said.
By 2021, excess casualty reached the peak hard market, during which one broker recalls seeing multiple-times rate increases and watching clients walk away with smaller limits or non-renewing altogether because of high costs. Over a four-year period, insurers achieved almost a 200% increase on rates, the source added.
Then last year came a “stabilization” of rates, where increases on higher excess layers flattened down closer to single digits while some layers higher up the tower even started showing reductions by the year-end.
However, one broker pointed out that behind that tapering was a slowdown of claims, as cases were held up in US court backlogs for 18 months during the Covid-19 pandemic. That situation has now changed.
The annual sum of corporate nuclear verdicts plummeted from $16bn in 2019 to around $5bn in 2020 and $8bn in 2021, according to data compiled by PR and research firm Marathon Strategies. That number spiked back up to over $18bn in 2022.
Anecdotally, some sources said that more cases were settled outside the court during the lockdown, because funders of third-party litigation – namely private equity firms or hedge funds - “still had bills to pay, needed to keep the lights on and lawyers employed”.
They were settling “mid-level fruits”, one broker said, referring to cases that were settled at $2mn out of court, for example, rather than pushing for $4mn at trial.
However, the “front page news” cases remained in the docket, with anticipation that they could potentially reach several hundreds of millions, or even the billions of dollars in claims once the courts fully re-open.
During the Covid-19 court lockdowns, there was a trend of carriers releasing older-year reserves, according to sources. But most of them held their reserve positions, expecting the effect of social inflation to come back to them eventually, probably at a larger size.
One claims executive noted that cases that should have been resolved a year or two ago are only starting to get resolved now. That has extended the tail of casualty lines to feel much longer than the norm of three to five years.
“When [insurers] gave a price tag four to six years ago, it was based on their assessment of what that claim would be worth – that number they based it on no longer exists,” the source said.
“Businesses they wrote that could have been profitable, is not going to be profitable now, just purely based on the size of claims that are coming down.”
According to the Marathon Strategies report, experts point to a number of reasons that drove up social inflation in the past decade: corporate mistrust; social pessimism, erosion of tort reform, public desensitization to large numbers, and shifts in jury pool demographics.
But some sources specifically pointed to the prevalence of advertisements that promise large claims from insurance companies. Before, there was a time when the public didn’t think that insurance companies were behind everything.
“For people, they're thinking, well I’m not really penalizing the company and I’m just hurting an insurance company,” said one source. “People think it's like an ATM with no consequences. That's how it's portrayed.”
From 2017 to 2021, trial lawyers spent $6.8bn on advertising. More than $1.4bn, or one fifth of that total, was spent last year.
Ventilation of risk
Amid an uncertain environment, carriers are using multiple mechanisms to manage their exposures.
Attachment points rose during the market firming years up to mid-2022, but did not budge even as rate increases abated by the year’s end. In auto liability, attachment points for lead excess layers gradually moved from $1mn up to $3mn-$5mn during those years and still hold up today. Carriers that did not follow suit in the past are increasingly joining on board.
Line sizes contracted significantly over the past three years. Some carriers are now carefully examining putting out more capacity, but in “tranches”.
Rather than placing one big chunk of excess casualty layer, carriers are “ventilating” risk through the tower, deploying slices of limits at different attachment points. The lower a layer’s attachment point is, the smaller the limits are, and vice versa.
“The problem is that the market is driven by severity more than frequency,” said one carrier executive. “That’s what led to many companies [to take on] more of a small bite approach.”
Overall, insurers remain fairly disciplined regarding capacity deployment, sources say. This also applies to new market entrants during the hard market years that have intensified competition in the higher excess layers. According to RPS, more than 20 new carriers joined the E&S casualty market between 2020 and 2022.
Even if they do take on a more aggressive approach this year, sources said that their surplus line sizes are still relatively small to allow them start attaching at lower points of the tower where the higher premiums are. “That’s when the market [will] really start to get driven in a different direction,” a broker said.
The lead excess layers, on the other hand, are still dominated by big multinational carriers such as Chubb, AIG and Zurich. And according to sources, these industry leaders are not signalling to expand risk appetite in this space. “If economics are the same, there’s no reason for capacity to go up and pricing should continue to pace with loss costs,” said one executive.
That reasoning applies to macroeconomic inflation as well. The all-items consumer price index (CPI) moderated 12 months straight to a 5% gain in March.
Moderation is happening in price indexes related to motor vehicle and medical services as well. But as the Inside P&C’s Research team noted, loss cost components are still increasing, therefore even if the charts show moderating changes year-over-year, the levels for any of the given items are at, or near, all-time-highs.
Interest rates have also risen, which some sources said weaken carriers’ arguments for higher rates at the negotiation table. Savvy clients understand that long-tail casualty lines can benefit from the current interest rate environment, via the higher returns made on their investment portfolios. However, others argue that the interest rate hikes have still been smaller than overall inflation.
Also, sources point out that a lot of carriers who provide lead excess layers offer bundled coverage with primary casualty layers as well, where lines like workers’ competition remain attractive business. Securing coverage for these profitable primary casualty layers often requires a “give and take” approach for carriers to fold on the rate increases they want on the excess layers.
There’s also a school of thought which simply believes that re-acceleration of rates in excess casualty is unlikely unless there is a significant event that rattles the industry.
“For a re-acceleration to occur, a specific event would be needed, either significant market contraction, or legal matter to create concern,” said a broker source, adding that nothing of such scale appears to be on the horizon for the remainder of 2023.
Others said the final verdict depends on the severity trends of 2019-2021 claims that are now incoming. While social inflation is nothing new to the industry and underwriters are preparing for larger claims, there remains a question on whether they will fit into expectations or exceed them.
As one source pointed out, that subtle combination of familiarity and surprise may create the force for another tipping point in pricing.
“Because everybody is so aware of it and so attuned to it, it’s not going to take much for people to say, ‘Yeah, you know what, it's not enough we need to continue.’”
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