Rising Litigation Expenses and Increased Jury Awards
Rising litigation expenses and increased jury awards are placing significant financial strain on the casualty reinsurance sector, leading some carriers to bolster their reserves and squeeze profit margins, according to a recent AM Best report.
AM Best’s Market Segment Report
The Best’s Market Segment Report, titled Casualty Reinsurance Capacity Remains Plentiful Amid Concerns, highlights that reinsurers continued to offer substantial capacity during the January 2025 renewal season. However, the report warns that without proactive measures to alleviate some of the sector’s challenges, the casualty reinsurance market could face an availability crisis.
Rate Increases and Social Inflation
A panel at a recent AM Best reinsurance renewal briefing noted that US reinsurers with casualty reserve portfolios achieving rate increases of 8%-10% are falling behind in addressing rising loss costs. In contrast, markets pushing for rate hikes of 15%-20% are better positioned to navigate these difficulties.
Social inflation remains a key driver of casualty loss trends on past years and continues to create uncertainty across the casualty landscape amid negative social sentiment, added Dan Hofmeister, Associate Director, AM Best.
Hofmeister was addressing the escalating costs of insurance claims driven by factors like rising litigation, larger jury awards, and an expanded interpretation of policy coverage.
Challenges and Reserve Strengthening
These challenges have significantly strained reinsurers, prompting them to reevaluate their pricing strategies and reserve adequacy. In response, many global reinsurers undertook reserve strengthening measures in 2024 to address adverse developments.
Shift in Reinsurers’ Focus
In 2022, a reluctance among investors to absorb the growing volatility in the property market led many reinsurers to scale back their capacity in that sector. Much of this redirected capacity was then allocated to casualty lines, which seem to be favoured by equity markets.
We examined publicly traded reinsurers’ stock prices over the past 20 years, commented Guilherme Simoes, Senior Financial Analyst, AM Best. We found that reinsurers with higher allocations to property lines saw a lower average yearly increase in stock prices compared with those with higher allocations to casualty lines.
Future Outlook
The report highlights that the reinsurance market experienced adverse reserve development on previous casualty years throughout 2024, with no immediate relief expected. Unlike the property segment, the casualty market is more complex and cannot be easily addressed by adjusting attachment points or underlying terms. The report predicts that the underlying business will continue to worsen as social inflation drives up loss costs.
