Reinsurance renewals continue to be affected by third party litigation

AM Best has published a new commentary note saying reinsurers generally maintained adequate capacity for casualty programs during the January reinsurance renewal period, but researchers add that attachment points, terms and conditions are unlikely to be relaxed anytime soon.

Multiple price increases 

“More frequent and severe weather events have resulted in multiple price increases for property catastrophe reinsurance over the past few years. However, reinsurers remain hesitant to allocate more capital to these exposures until there are clearer indications that technical rate adequacy has been achieved,” AM Best writes in its announcement about the publication’s release.

Entitled Best’s Commentary, Despite Heightened Risks, Casualty Reinsurance Renewals See Modest Price Changes, they add that “the trade-off between property catastrophe reinsurance and casualty reinsurance was very much a factor during the latest renewal season.” 

Social inflation 

They say third party litigation funding in the United States continues to drive social inflation “with sophisticated plaintiff attorney tactics contributing to inflated judgments,” they add. These tactics include advanced marketing and emotional messaging. Notably, AM Best points to research which suggests that third-party litigation produces an internal rate of return of about 25 per cent for those funding the litigation. “If investors can consistently achieve this rate of return, especially on investments generally uncorrelated to other financial assets, the practice will continue, driving up loss costs for insurers.” 

Commercial auto results  

Commercial auto is also a sore spot, creating reinsurance pricing challenges. “Following near-breakeven underwriting results in 2021, commercial auto results deteriorated to an underwriting loss in 2022 comparable to the 2016-2019 period,” the report states.

They also say over the past decade commercial auto, general liability and directors and officers (D&O) liability insurance have all been notably affected by social inflation. That said, they add that D&O and cyber liability risk pricing has moderated following notable pricing increases in recent years. D&O rates have softened in the primary market and improved cyber liability results have led to more efficient renewals.

Fastest growing line of reinsurance 

“Cyber insurance is the fastest growing line of reinsurance and demand will continue to grow, which will in turn flow through reinsurance demand,” they write. “Overall pricing on cyber has softened, with ceding commissions rising. In 2023, the first cyber reinsurance catastrophe bonds were issued, as well as the first industry loss warranty bond (issued by Swiss Re, they add). These are signs of more capital coming to support the cyber reinsurance market, including excess of loss reinsurance.”