Time to change the rules in casualty, not fold – yet, says TransRe

Normally we shy away from gambling analogies when discussing the re/insurance industry, and some will bristle at the comparison. We see ourselves as risk transfer specialists, not adrenaline-seeking risk takers. We sell protection, we don’t buy thrills.

Key points:
US casualty verdicts: doubled twice since 2014
Reforms in motion, but delays likely
Switch from losses occurring to claims made?

While it is hard to generalize about such a deep, wide and diversified market, seasoned observers might know a losing streak when they see one. Calling it ‘a soft market’ doesn’t diminish the outcome, and it is hard to argue professional integrity when we have been collectively trading unprofitably for so many years.

How bad is it? The number of bad years is expanding and the losses in each year are deepening. Now isn’t the time to fold, but it may be time to change the rules.

We know how we got here. The Covid court closures provided a brief respite but only paused the punishment. The courts re-opened, and juries quickly resumed their generous assessment of the size of the pot.

Everything goes up

Two charts tell the tale (view on online version – wwwintelligentinsurer.com/monte-carlo-today). The first shows the annual median of the top 50 US casualty verdicts. Having doubled between 2014 and 2019, they have doubled again since 2019.

Our second chart is based on over $150 billion of commercial umbrella and excess business we have priced since 2010. In response to median verdicts doubling and doubling again, we (the industry) were slow to react to the first doubling and appear to have been playing catch up ever since.

Prices up 3.5x looks good; unless losses are up 4x. Fours beat threes. On which point, a digression to mention non-US insurers, who must feel they are between a rock and a hard place. Their local markets are in different parts of the cycle. They face a choice. Which do they prefer?

Negative-5% with no US exposure, or +5% with US exposure? Please pause before you choose. The easier option may be the 5% uplift in rate, but this is a dangerous game, and in time, the former could well prove to have been the more lucrative or (more likely) less costly option.

In lotteries, the delight of a few is paid for by the many. In effect, jurors have inadvertently created their own state lotteries, which are ultimately paid for by every person and every small business that buys a local insurance policy.

The plaintiffs are often playing with other people’s money too. The rise of litigation funding as an alternative asset class has allowed third party ‘investors’ to bet on individual cases, class actions and entire portfolios of law firms/attorneys. Reforms are working their way through the various US states – mostly around disclosure (if defendants must disclose insurance, why shouldn’t plaintiffs disclose funding?). We wish the reforms well, but we anticipate delays and dilution. There is no substitute for taking our own action.

What can insurers do?

At an individual case level, we can practice sensible claims hygiene. Defendants face accusations of bad faith, vengeful jurors and well-funded attorneys. To win, they must upgrade their weaponry: bring the best team from the start (cases can be won and lost in discovery); get your number on record (anchoring works both ways) and call out litigation funders where you can.

At the individual policy level, we must keep plugging away with prudent risk selection, strict limit deployment discipline and continue to push double digit rate increases.

More systemically, the time may be right to change the rules. Switching from losses occurring to claims made coverage would not be easy, with a need for defined (and aligned) retroactive dates (to avoid double coverage), well defined claims series clauses, and the potential complexity of different coverage within the same tower.

But when did a little complexity stop us? The benefit is a shorter tail, and the ability to respond quicker and adapt to changing market conditions, which should improve results in the longer term.

When buying reinsurance, different structures have their place but remember your reinsurer/s need to navigate the market too, and the stern test of US casualty requires risk alignment, which usually means quota share, especially if your programme includes high excess and/or Fortune 1000 risks. Introducing excess structures at this time may cause false starts or falls at the first hurdle.

In Closing

The big winners of the past decade have been the plaintiff’s bar and those who funded them. At times it has felt like we are all playing in the plaintiff’s House. Rates have been rising, but claims inflation is showing no signs of slowing down. Legislative/judicial relief may be coming, but it’s patchy. Defendants are fighting back, but is it enough? A gambler might predict more adverse developments ahead.

But we’re not running away. Despite the years of bad industry results, some insurers outperform others. We navigate this market the same as always – we differentiate by client. We stack our chips behind those diligent enough and skillful enough to throw away the bad cards and be left holding the best hands. Threes beat twos.

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