Fitch Ratings, the credit rating agency, has reported that reinsurers will likely push for double-digit increases in US casualty premium rates during policy renewals in January 2025, as companies look to keep pace with elevated loss costs.
This adjustment is seen as necessary in light of where loss costs have trended, with unfavourable trends in US casualty losses, driven by increased social inflation, a key factor in Fitch maintaining its ‘neutral’ outlook for the global reinsurance sector.
Fitch anticipates challenging negotiations with cedants, as reinsurers believe the 2024 rate hikes in US casualty have been insufficient.
During the mid-2024 renewals, rates rose by up to 15% for loss-affected accounts and by up to 10% for those without losses. In January 2025, reinsurers are expected to seek further rate increases, along with reductions in coverage limits and quota-share commissions.
Concerns among reinsurers about market prices being too low have led many to scale back their exposure and limit capacity, especially in areas most impacted by adverse loss development.
The rating agency notes that major players such as Munich Re and Swiss Re have notably reduced their participation. Reinsurers are also requesting more detailed information from cedants to refine their risk selection process, which seems sensible. At the same time, cedants’ demand for coverage is increasing, creating a growing gap between supply and demand, which is likely to continue pushing rates upward.
Fitch also predicts that loss costs will keep rising in 2025, spurred by social inflation and increased manipulation of the US legal system.
The growing frequency of verdicts exceeding USD 10 million, the higher involvement of attorneys in claims, and developments in the litigation funding industry are all contributing factors.
Additionally, latent liability risks, such as those linked to opioids, microplastics, and PFAS (synthetic chemical substances), present significant challenges for casualty reinsurers.
Although US tort reform could help slow the increase in loss trends, Fitch notes that it is not a priority in the near future.
There is also the possibility that social inflation could spread beyond the US to other common law countries, including the UK, Canada, and Australia. Civil law jurisdictions, such as France and Germany, appear less vulnerable due to the role of judges and limits on damages.
Fitch highlights that several reinsurers have recently faced adverse reserve developments. For instance, Swiss Re added USD 650 million to its US casualty reserves in the first half of 2024, following a USD 2 billion addition in 2023. PartnerRe also significantly bolstered its US casualty reserves in 2024, while Axis recorded a USD 425 million reserve charge in late 2023.
Interestingly, Fitch believes that while some of these reserve increases were necessary, others may have been opportunistic, capitalising on a strong period for property reinsurance underwriting.
Surplus reserves in workers’ compensation and property lines have helped offset deficits in more vulnerable sectors, such as general liability and commercial auto.
Additionally, US liability business from accident years 2015-2019 has shown significant incurred-loss development. Longer-tail lines, such as excess liability and umbrella policies, may face further reserve challenges from these periods.
More critically, it remains uncertain whether incurred-loss estimates for US casualty business in accident years 2021-2023 will be adequate. Insurers have been posting more conservative initial loss ratios, with higher reserves for incurred-but-not-reported losses and significantly larger reserves per claim.
While Fitch expects the US casualty reserve experience to remain difficult through 2025, outcomes could vary significantly among individual companies.
Nonetheless, the agency does not anticipate that reserve weaknesses will have a major impact on capital, as seen during the late 1990s and early 2000s, when several reinsurers faced downgrades. Most reinsurers are expected to absorb necessary reserve increases through earnings, with minimal impact on capital.
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