The (re)insurance market is grappling with some key uncertainties that impact not only go-forward underwriting and pricing strategies, but also capital strategies for both servicing the legacy portfolio as well as growth as the market hardens, according to Christopher Ross, Managing Director, Guy Carpenter.
- What caused the change? Understanding this helps determine the size and scope of corrective actions to improve profitability.
- How much more development will there be in the recent reserve period?
- How much capital is tied up to service the tail versus being deployed to capitalize in a hard market? Are there solutions, such as an adverse development cover (ADC) that could be a way to release capital rather than having to raise it in the investment markets?
Those companies that can solve for these uncertainties quickly are in the best position to take advantage of the current hard market opportunity and the next cyclical period.
To answer the first question, since 2011 a clear change has taken place in claim frequency and severity across most casualty lines. One driver is now commonly referred to as “social inflation,” but there has also been an increase in large, catastrophe-type claims over this period. A changing legal environment, increasingly punitive jury pools, third-party claim financing and medical advances all made the value of claims increase. We see this particularly in commercial auto and umbrella where the lead umbrella limits are often impacted by auto losses that historically stayed within the primary USD 1 million auto policy limit. This trend coupled with a spate of large loss and systemic events, such as the opioid crisis, wildfire claims and industrial accidents, not to mention very long-tail sexual abuse and molestation claims arising from changed survivor statutes, has affected all areas of the casualty market: primary, lead and excess liability carriers.
In response to this, the marketplace is taking corrective actions including price increases, limit reductions, attachment point changes and underwriting appetite shifts all meant to re-position portfolios going forward.