Aon panel debate: Casualty capacity still available as renewal dynamics shift

Casualty reinsurance capacity remains plentiful ahead of the upcoming 1 January renewal despite concerns over adverse development on prior year reserves, according to Amanda Lyons, executive managing director at Aon’s Reinsurance Solutions.

One of the key talking points during this year’s conference season has been around casualty renewal dynamics, with expectations of a sharp uptick in demand and a mixed appetite for growth among reinsurers amid concern around loss trends.

But while she acknowledged many are suggesting there are similarities with last year’s property catastrophe renewals, Lyons said the supply-demand imbalance witnessed at 1.1.2023 is not an issue for casualty at the upcoming renewal.

“We have challenges in the casualty space – we’re seeing adverse development from the soft market years, inflation, nuclear verdicts – but we don’t have that supply-demand issue. There is plenty of casualty reinsurance capacity out there,” she said.

Lyons added that it was critical reinsurers differentiate among clients and recognise the steps taken to address the challenges that arose in the soft market.

“Everybody delimited their portfolio in the general casualty space and worked on getting significant rate increases in the last three or four years.

“While the pace of those rate increases may have slowed, in many areas and segments, casualty pricing is probably at an all-time high. And what makes us even more optimistic is that we've seen that pace of rate increase start to tick back up in Q2 and Q3 on the insurance side.”

She said clients were now in a position where there is a lot of capacity available should they wish to make changes to their reinsurance panel.

“We are helping our clients to assess not just the range of reinsurer quotes, but also other capital options available to them, as we progress towards firm order terms. It's a very interesting, dynamic space at the moment.

“We continue to use our extensive tools and solutions to differentiate our clients and help shape better decisions on their behalf,” she said. “At the same time, we urge reinsurers not to take a broad-brush view of the market.”

Managing casualty exposures

In a virtual panel discussion hosted by The Insurer TV, Lyons was joined by Tim Aman, Aon’s executive managing director.

Aman pointed out that casualty margins have expanded materially over the past two years due to increases in anticipated investment income. Interest rates are at a 15-year high (5-year US Treasury rates have increased from less than 1% to around 5% over the last two years), which Aman noted “has significant implications for reinsurance industry returns”, especially for third-party liability where losses may not be known or payable for several years or even many years”.

Aman highlighted that the casualty sector had underestimated loss ratios during the last soft market cycle, but said the modelling of casualty catastrophe risks had seen significant advancements over the past decade.

“We're now in the phase where we're building stochastic models and distribution assumptions,” he said. “We've been able to capture and map exposure information, and we’ve been able to put together scenarios.

“From here, it's about improvement loops, and making sure we are able to continue to refine model assumptions and respond and improve the models when events happen.”

Praedicat CEO Robert Reville likened the development of casualty catastrophe modelling to the evolution of property catastrophe models.

“The first property catastrophe modelling companies emerged in the late 1980s but it took around 10 years before there was much market acceptance of the idea.

“Then there was a time period of elevated natural catastrophes – Hurricane Andrew, the Northridge earthquake, and later Hurricane Katrina – which reinforced that people need to model the risk.

“Similarly, for [Praedicat], we started around 10 years ago, as did the casualty catastrophe field in general, and have been developing as the risk environment changes around us.

“We're seeing increased mass torts, we're seeing the increased demand for managing the risk in these ways – it's following a very similar path.”

Emerging risks to watch

Some emerging risks in the casualty space remain more challenging to quantify, most notably the threat from per- and polyfluoroalkyl substances (PFAS).

“Forever chemicals – Teflon, Scotchguard, firefighting foam, and a wide range of industrial applications – unfortunately, we now understand exist in the environment for a very long time, and also cause bodily injury,” Reville said.

“We've been seeing a growing amount of litigation around it. We've been seeing water contamination litigation. We've been seeing firefighting foam litigation. Some of that involves bodily injury as well.

“There's a great deal of concern, given the size of the industrial footprint and the number of companies that are potentially involved, that this could be a very large insurance loss in the future.”

Of all the risks deemed as the potential “next asbestos”, Reveille said PFAS was the most likely candidate to emerge to date.

He also highlighted addictive software design litigation as an area to watch.

“This is the allegation that the social media companies are responsible for the rise in teenage depression and suicide,” he explained.

“The size of that social loss is huge and, as a result, as you might imagine, the potential size of casualty losses is quite large. It's pretty concentrated so far within social media companies, but there is potential for it to expand into hardware, gaming or other areas, where there could potentially be quite a bit of exposure.”

In addition, he highlighted the emergence of climate casualty exposures following litigation against oil and gas companies.

“Legal scholars and environmental groups suggest that it could and should go into other areas such as diesel, logistics, engine manufacturing, automobiles and agriculture.”

Casualty LPTs on the rise

Barry Gale, Aon’s head of legacy, highlighted the rise in loss portfolio transfers (LPTs) in the casualty space as (re)insurers look for ways to more effectively manage their capital base and deliver earnings protection.

“We are now seeing really strong, well-capitalised, leading insurers and reinsurers looking to effectively manage their capital base and deliver earnings protection, across all lines of business through LPTs, particularly in the casualty space.”

Gale said the elements of a successful LPT include good quality data, evidence that key risks have been considered as part of the reserving process and confidence from the legacy markets that they are able to add value to the process.

He said it was critical that cedants are able to demonstrate they have properly evaluated risks such as social and economic inflation.

“The legacy markets continue to reward cedants that can demonstrate that they've considered these sorts of risks and can differentiate their portfolio and their experiences from the wider market in aggregate,” said Gale.

He said long-tail liabilities play to the strength of the legacy markets, which have extensive experience of most types of liability claims.

“We expect to see more cedants using the LPT mechanism in the next few years as they're working their way through these and other challenges.”

Partnering for the future

As Aon helps its clients prepare for the 1.1 renewal season, it has partnered with Praedicat to create new solutions and products that it says incorporate emerging risk modelling and analytics into reinsurance decisions.

“We're going beyond reinsurance in some ways,” said Reville, who explained how companies are often exposed to emerging risks that can make future claims patterns increasingly variable.

“A simple question would be, for instance, how much limit should you buy given the amount of emerging risk exposure you have.”

The new product it’s creating with Aon will help firms make such decisions more easily, according to Reville.

The firm is also working with Aon to help its clients make more informed decisions about controlling emerging mass litigations.

It’s all part of addressing what clients may experience as competing market forces. On one hand, their rate adequacy is in a good spot, said Lyons. But on the other hand, the emerging risks are a question mark, one they’re unclear how to price for.

“And then, from the reinsurer standpoint, they're seeing adverse development and seeing a need to change pricing. But at the same time, interest rates are at an all-time high, so that has an impact on their returns,” said Lyons.

That’s where the partnership comes in.

“For us, entering into this partnership with Praedicat was really like a first step to get to that standpoint, where casualty clients feel more comfortable when they're making decisions about how they buy, what they buy, and we have to get there.”

It’s a work in progress, said Lyons, but bringing in analytics could help firms come up with more than one solution without feeling stuck with just one move. That flexibility will no doubt be welcome when renewal time returns.