Don’t mistake short-term price fluctuations for a sign of lower long-term risks

What are your expectations for rates, terms, and conditions in this renewal?

Key points:
Casualty market remains disciplined
Concerns linger over loss developments
Regional nuances in casualty performance

Forecasting rates is much like forecasting the weather – you’re often wrong, and few remember when you’re right. Looking at the current year in isolation, the market remains disciplined, marked by prudent limit deployment and ongoing rate increases. 

This continued rigour is driven by persistent loss development from prior years and rising award levels. While we believe that current rates are generally aligned with loss trends, it remains unclear whether they are truly adequate, given the uncertainty around the baseline. Until prior years stop deteriorating, that uncertainty will remain – and as with any market, uncertainty fosters discipline.

Given the softening in some P&C lines, how are you balancing growth and discipline in casualty in the context of growing uncertainty and volatility in US casualty lines?

“Forecasting rates is much like forecasting the weather – you're often wrong, and few remember when you’re right.”

TransRe has consistently maintained a focus on long-tail business, and that commitment remains unchanged. We deliberately avoid a “one-size-fits-all” approach, instead seeking to differentiate based on the quality of both the cedant and the underlying portfolio – a strategy that’s particularly critical in the current environment.

That said, it is essential structures and terms reflect the underlying challenges and enable us to provide support across market cycles. While various structures have their merits, they must offer balanced value to all parties involved. The same pressures that have affected primary insurers have also impacted the reinsurance sector. Risk alignment remains paramount – typically best achieved through straightforward quota share arrangements with appropriate ceding commissions, particularly where programmes include high excess layers and/or exposure to Fortune 1000 risks.

Earlier this summer we published some data showing the extent of the challenge our industry faced. Collectively the it has raised rates significantly since 2014 (see graph 1) but the number of nuclear verdicts has kept pace (see graph 2). Meanwhile, the severity of those verdicts has increased even more (see graph 3). It isn’t the frequency or the severity of nuclear verdicts that is challenging us, it is the frequency of severity.

What underwriting adjustments or data strategies has TransRe implemented to stay ahead of emerging liability risks?

We are currently finalising a summary of GLP-1 exposures – the title “Ozempic multi-district litigation” offers a clear indication of the focus. In parallel, we have just concluded our annual emerging risks forum, which brings together our underwriting, actuarial and claims teams to assess evolving trends.

Our monitoring approach includes a range of indicators, such as industry publications and commentary from peers and clients. While no single organisation holds all the answers, it is essential to stay informed on the most current and credible insights.

“The re/insurance industry is still struggling to gain confidence in determining US casualty loss trend. This is what continues to drive the relatively positive market conditions over the past few years.”

We continue to emphasise the need for greater transparency from our cedants, with increased access to data and deeper visibility into underlying portfolios. This allows us to conduct robust peer comparisons and make more informed decisions around ceding commissions and levels of support. Moreover, a cedant's ability – or inability – to provide such data can offer valuable insight into their operational practices.

How do you see the casualty treaty reinsurance model evolving over the next three to five years, particularly in light of cedants retaining more risk?

In terms of US casualty reinsurance, the industry is still adding up the losses from 2015-19 as well as watching the 2020 and 2021 years develop unfavourably. We believe the re/insurance industry is still struggling to gain confidence in determining US casualty loss trend. This is what continues to drive the relatively positive market conditions over the past few years. 

Our view is ceding companies who retain more risk in such an uncertain (loss) environment might be overconfident or forced to do so given reinsurance terms. We believe quality reinsurers, who have broad experience across the casualty industry, can provide cedants value outside of capital support, in terms of underwriting, claims and pricing insights. We think the number one priority of the casualty (re)insurance industry must be to prove to ourselves that we can make a reasonable and consistent underwriting profit.

Are there notable differences in how casualty risks are developing across the Americas, and how is TransRe responding to those regional nuances?

We continuously analyze our global casualty portfolio to identify emerging trends and potential areas of concern that may impact multiple regions.

In the Americas, the picture is mixed. The US remains a key area of focus, with ongoing challenges driven by social inflation, nuclear verdicts, litigation financing and adverse development on long-tail exposures from 2015 to 2021.

Canada, by contrast, offers a more stable legal environment, with fewer extreme jury awards and a lower frequency of litigation, making it a more predictable market.

In Latin America, as expected, legal frameworks vary significantly by country. However, overall litigation levels remain low and large settlements are relatively uncommon. From a risk perspective, both Canada and Latin America share similarities in terms of lower severity and volatility compared to the US.

On the property cat side, how are you helping clients deal with growing volatility, including increased losses from SCS and wildfires?

At the risk of looking backward rather than forward, the pricing and retention ‘reset’ of 2023 signaled a ‘back to basics’ approach to managing the frequency of convective storms, and both the frequency and severity of wildfires. Everyone focused on aggregate management through a deal-by-deal approach to risk accumulation and significant pricing adjustments. 

Today we see insurers who are withstanding higher retained losses thanks to their underwriting discipline, and that in turn means viable opportunities for risk transfer without returning to pre-2023 ‘earnings-protection’ levels. 

Again, it comes back to our common theme – insurers who manage their aggregation effectively, price their exposures appropriately and share their data willingly will find us very receptive to their proposals. Those who don’t, won’t.

What regulatory changes would you like to see? Can California learn lessons from Florida?

I am not going to be so bold as to recommend specific regulatory changes other than to point out the obvious – the homeowner’s market is clearly broken in some jurisdictions in the US. I will use California as an example as I live there and am a policyholder. California is the fourth largest economy in the world with one of the highest, if not the highest, property values in the country. 

What is the current state of our homeowner’s market? There is no healthy private homeowner’s market. Insurance companies have very little opportunity to make a profit in the state for well-documented reasons, so why would they stay, much less expand?

It is extremely difficult to get insurance quotes in the state so most everyone is holding tight to their current insurance provider and hoping they don’t get cancelled. Of course, a lot of people are indeed getting cancelled as insurance companies are doing everything to tailor their portfolio – not to optimise profit, but to minimise expected loss. 

The California FAIR Plan is supposed to be an insurer of last resort, yet it is exploding in size. Earthquake insurance is not mandatory – which is crazy – so there is no private earthquake insurance market in the state, either. Again, this is the fourth largest economy in the world. The solution to all this is to attract risk capital to the state, rather than scare it off. 

Allow the forces of the free market and open competition to work to provide more competition and choice for California citizens. Capitalism works if you give it a chance.

Kyle Rhodes is president of TransRe Americas. He can be contacted at  krhodes@transre.com

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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