US casualty rebound gathers pace as capacity expands

Reinsurance capacity is returning to US casualty, but social inflation, nuclear verdicts, uneven tort-reform landscape, and rate adequacy continue to shape disciplined deployment, while international markets are seeing broader competition.

Key points:
Improved US underlying performance attracts capacity
US reinsurers remain selective in capital deployment
While mitigating, rate change remains at or above trend
International competition broadens as supply grows

“There is a sizeable segment of reinsurers and capital providers that have come back to the US casualty market because they see it as a profitable space and want to partner more holistically with clients.” 

US casualty buyers are heading into the January 1 renewals with a greater range of risk transfer options, after a slow but steady return of traditional reinsurance and insurance-linked securities capital to the sector. This is the view of Nick Nudo, Aon’s Reinsurance Solutions senior managing director and US head of casualty, who says that the additional supply has created a stable to slightly improved market over the past 12 to 18 months – although liability pressures continue to limit the pace of change.

Nudo notes that years of compounded primary rate increases, tighter terms, and portfolio re-underwriting have improved the underlying business and made the casualty class more attractive to capital providers. Some reinsurers are also turning towards long-tail classes as conditions soften in property catastrophe, while others want to support casualty as part of broader relationships with important clients.

“I think there is a sizeable segment of reinsurers and alternative capital providers that are looking at the US casualty market because they now see it as a profitable space.

However, while there is ‘a great deal of capital returning to the sector’, Nudo highlights that liability issues are tempering enthusiasm to a certain extent.

“Persistent social inflation, nuclear verdicts and an improved but uneven tort-reform landscape have meant that returning capital is being deployed cautiously,” he says. “Reinsurers are competing more actively, but continue to differentiate sharply between cedants and portfolios.”

Capital returns, caution remains

The casualty capital influx has produced only moderate improvements to reinsurance terms as reinsurers are still cognizant of the US legal environment. Florida, Georgia and Louisiana have introduced reforms, while New York is considering changes, but Nudo said these remained state initiatives.

“US casualty Reinsurers are recognising carriers with underlying improvements, sound business plans, and alignment with their claims departments as those they want to do business with.” 

“Insurers and reinsurers welcome these reforms,” says Nudo. “But it’s not federal reform – it’s still very state-specific, and capital providers want to see the reform proved-out.”

The difficult tort environment constrains capacity and reinforces pricing and underwriting discipline, furthering a firm US casualty market.

“The US legal environment is clearly not in insurers’ or reinsurers’ favour,” he continues. “This dynamic rewards insurers and reinsurers being conservative with their capacity, and making sure the terms are right. This environment also keeps buyer demand for casualty reinsurance high.”

He nevertheless expects US casualty to remain attractive, despite reports that rates in some pockets are not keeping pace with loss trends.

Nudo said Aon’s analysis of underlying business within reinsurance placements showed improved profitability at each renewal period in aggregate, which he regarded as evidence that the industry at large is moving in the right direction. Reinsurers were responding by expanding capacity especially with the most profitable cedants, as opposed to taking a market-wide approach.

“Reinsurers are recognising underlying improvements and beginning to expand in this space with those they want to do business with,” he said.

“There’s a lot more competition in the market, but most actors are still pretty responsible and conservative in their capital deployment.” 

International competition broadens

At the same time, international casualty buyers are also approaching 1/1 from a stronger position. New entrants and existing reinsurers pursuing growth have increased their capital supply, while favourable loss development, portfolio repositioning and the diversification offered by international business have supported appetite.

Competition is broadening across a wider range of business as reinsurers pursue different growth and portfolio objectives. Capacity is coming from both new carriers and established markets looking to expand, giving buyers access to a broader set of potential partners.

Greater supply does not mean reinsurers will compete equally for every portfolio, observes Nudo.

“Appetite depends on whether new business fills a gap in an existing book, adds to a concentration, or offers the potential to outperform across the cycle,” he says.

That assessment includes where claims could be brought, not simply where a policy was written. And as Nudo observes: “Portfolios can still attract support where cedants demonstrate a selective underwriting strategy, effective management of the exposure through the cycle, and proactive claims handling.”

Nick Nudo is senior managing director and US head of casualty at Aon’s Reinsurance Solutions. He can be reached at: nick.nudo@aon.com

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

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