Don’t paint all casualty business with the same brush

Reinsurers have been warned not to paint all casualty business with the same brush this renewal, as they reassess their books and try to price in their concerns around this line of business. Instead, cedants should be judged on an individual basis.

That is the message from Pete Chandler (pictured0, chief executive officer of  BMS Re speaking ahead of APCIA. He said there will clearly be pressure on this line of business from reinsurers, keen to change terms and conditions and ceding commissions, as well as rates. The job of the broker is to make reinsurers underwrite individual cedants and books of business.

“Our job is to make them assess each treaty on its own right,” he said. “We want underwriters to view each transaction on an absolute value basis and not paint the entire casualty arena with the same brush. That is sometimes what underwriters attempt to do.

“What we’re saying is: ‘underwrite each transaction on its own merits and don’t lump it in with everybody else’s’. Risk selection matters, attachment points matter, production sources matter and balances of portfolios matter. But look at everything on that individual basis.”

He acknowledges the concerns of reinsurers, which stem from inflation, poor development on prior accident years, and losses developing negatively. But he is steadfast in his demand that individual treaties should be underwritten on merit alone. “Yes, it’s a bell-shaped curve and there’s always stuff in the tail, but our business is in the more positive end of the tail,” he said.

Chandler stresses that in such negotiations, data matters—but so do relationships. “This is where underwriting acumen and track record matter. Those are the themes we want articulated, succinctly, and crisply as we move to negotiations.

“We want them to underwrite the business in front of them and not work to a corporate mandate. The business has to stand on its own two feet and that’s what we’ll be pushing.”

Moving into fac

Chandler’s plea comes against this backdrop of a market still fragmented and dislocated in some areas. Property went through the mill last year and although it has now stabilised many insurers are grappling with higher rates, retentions, and gaps in coverage. Now, it seems the same fate will befall casualty business this year.

This dislocation has meant an increase in demand from cedants for facultative solutions—and BMS Re has been quick off the mark to realise this. It was already operating in the facultative space, but in August it invested to strengthen its facultative practice and drive expansion in key markets.

Steve Housse, formerly of Guy Carpenter, was appointed as managing director and facultative practice lead; Dan Shea, formerly of Lockton Re, was named senior vice president of property facultative. In addition, James Elliott, currently a managing director at Gallagher Re, will join BMS Re as managing director and facultative practice lead in the UK in March 2024.

Chandler says demand for facultative solutions are rising—and these hires are well timed.

“There is a need for these solutions,” he said. “With capacity still tight in some areas, there has been a flight to the E&S side of the ledger, and facultative is in demand. We’re very well-positioned to deliver what our clients need.”

He notes some specific lines that are stressed and thus in need of facultative solutions. Commercial habitational insurance is a big one, he said. “There is so much demand, but treaty underwriters are filled up on it.”

Commercial automobile is another where “underwriters just don’t want it; unless the pricing or the terms and conditions are so punitive, it doesn’t make sense to place it into treaty”.

Facultative solutions are also being used to top up limits, perhaps in lines exposed to “nuclear” verdicts in claims. “You’re seeing nuclear verdicts, especially in auto cases, that are just astronomical. So underwriters are purchasing facultative coverage to bolster treaties where they perhaps don’t have enough limit,” Chandler explained.

“We think that’s going to continue for the foreseeable future. Equally, as inflation continues to rear its ugly head in our industry, and underwriters are more cautious where they deploy their capital, primary insurers are utilising facultative to fill those gaps.

“We’re thrilled to have the team that we have to provide those solutions.”

Risk model concerns

Chandler notes that a further need for innovative solutions could stem from a growing unease around the reliability of risk models. For some time, there has been a concern the industry does not have a handle on some secondary perils such as wildfire, flood and severe connective storms.

Hurricane Otis, a category 5 storm which hit Mexico in recent weeks, also illustrated the limitations of risk models on some primary perils. The storm was not forecast to intensify in the way it did and caught the industry off-guard.

Chandler believes the industry has become too reliant on risk models, which have always had their shortcomings.

“It is a challenge for the industry, but the problem is insurers are walking away from certain risks as they feel they have no idea how to underwrite or price them.

“Yet we have so much data. For me, that has to be an opportunity. We should be running towards that problem and look to provide a solution,” he said.

The sector cycle

Chandler believes the cycle of the industry will be on the agenda at APCIA. While market conditions remain hard and investors cautious, he believes it is inevitable that it will eventually swing the other way.

“This is a cyclical industry. If the weather is benign, we get excited and we keep reducing our prices. We end up with an overabundance of capital. When a loss occurs, the pendulum violently swings the other way.

“I’d like to believe that some day we’re going to find the cadence where we’re all on the same page. But hope is not a strategy. I’ve been doing this for 36 years, and it hasn’t happened yet.

“So, we’ll continue to ride the pendulum back and forth. As a broker, we will control things which we can control. We’ll secure the best support for our specific clients without worrying about what we cannot control,” he said.

That said, Chandler does believe the swings are more muted, as insurers and reinsurers alike get a better understanding of the cost of risk. “This market will reverse course, but the swings will become more tempered and controlled. As underwriters price their products appropriately and adequately through changes in supply and demand, that should happen.

“But that’s what is driving a lot of the forces in our industry: the supply of capital and capacity versus the demand,” he concluded.

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