How is the casualty reinsurance market performing in 2022?
On the primary side, the market is probably the strongest it has been in quite some time. While the magnitude of rate increases is definitely slowing down, it’s still the third renewal of increases and, albeit those increases are smaller, they are on the back of more than three years of significant increases. Additionally, the rate increases are more targeted now, with lead layers getting slightly more rate than high excess layers.
From our standpoint, buyers of casualty reinsurance are in a good position. On the supply side, supply is still really high: there is a lot of strong casualty capacity and as reinsurers are diversifying away from property, we’re seeing a lot more interest in doubling down on the casualty reinsurance side. It is a very strong market
A lot of reinsurers think on the pro-rata side we might have hit the high-water mark in terms of cede, but we are still seeing increases there for certain types of portfolios, or ones where they have seen continued improvements in the underlying book. There are also reinsurers that have maybe taken a back seat in the soft market years, but are now aggressively going after pro rata business. Does that tap-out at some point for the market in general? Maybe, but what we’re trying to do is have more targeted conversations with clients around why and how they are buying, and having frank conversations about increasing retentions or not.
On the excess-of-loss (XOL) side, we have seen that be a little bit more of a challenging market, really driven by the leveraged impact of changes in reinsurers’ trend assumptions, impact of economic inflation or their perception of social inflation and how that’s impacting claims.
What impact is social inflation having on the market?
The theme of a lot of renewals (P&C) is getting ahead of what reinsurers are going to do around social and/or economic inflation. We are working with all of our clients, but those with xols in particular, to make sure they are highlighting what they are doing to manage increases in claims costs either from trend or factors such as inflation. Differentiation is key. Reinsurers are starting to separate those that have always had a cautious eye on this and have over time been steadily increasing rates above loss cost trend.
Some reinsurers are massively increasing their trend rate assumptions due to perceived social inflation. Clients have been doing the right thing, paying attention to loss costs, getting rate and reducing limits, so these price increases are a difficult reality to accept.
Our clients are concerned about this dynamic, so we’re paying a lot of attention to it. We know that verdicts are much bigger than they have been, but a verdict does not equal a settlement. And actual claims inflation is not necessarily ‘social inflation’. Further, if you agree that the court closure during COVID slowed settlements significantly, then you must buy into the fact that the re-opening will only further distort claims development patterns. All this to say that there will be a lot of nuance in every broke, and having a real technical story to tell makes all of the difference.
What are you seeing in terms of the impact economic inflation is having?
In general, it costs more to close claims. In the auto line of business, physical damage has become far more expensive than it has been in the past. What is driving casualty claims is medical and wage inflation, which has historically been higher than overall inflation. In the casualty world this is not new, as we have been watching medical inflation increase steadily for the past few years prior to COVID.
A lot of big casualty deals tend to be rated off payroll or revenue, so when you think about just economic inflation, it’s almost boosting the rating basis that the insurance risk is priced off. If you have the same number of employees doing the same job, but they’re all making 10% more than they were last year, your rating basis is up. So, is there a little bit of redundancy coming in on the front end? Does that make up for the increased costs of settling claims on the back end? Probably not. But you can see there are some positives and negatives when we think about the casualty side, as opposed to the property side. As tangent to this, is increase in interest rates, which is really a net positive for insurers, driving improved returns for long-duration fixed income securities. That increase in interest rates is also driving more and more capital into the legacy space, and we are having a lot of conversations with our clients about pursuing these transactions as a capital management tool.
How are you investing in the area of intellectual property and meeting specific client needs?
Aon has been working on intellectual property solutions for years, and we’ve made massive investments in talent and technology in that space.
Our development of IP solutions has been driven by the changing industrial environment, which saw the insurance industry’s relevance decrease in the late 80s, early 90s as the economy was transitioning from the largest companies having significant amounts of hard assets to use as collateral (such as GE), to the major corporations being the Apples and the Googles of this world – companies with far more intellectual property than hard assets.
To address this underserved market, Aon has created a tool that effectively allows clients to accurately value intellectual property and then use it as collateral. These high growth potential companies can use the insurance product and obtain financing to foster that growth without diluting their ownership.
The industry has historically tended to struggle in attracting new young talent, but here’s an example of an area where there was a massive protection gap and the creation of a whole new solution, which helps to generate excitement among the younger generation. In developing such solutions, we’re helping these companies obtain financing so they can grow and build business resilience. It’s pretty exciting to say you can be a part of a team helping to get a new product off the ground.
