Everest's Jiten Voralia: Casualty uncertainty at two-decade high

What do you expect to be the focus of your conversations at APCIA?

When it comes to casualty, I expect that the conversations will focus on the casualty headwinds going into 2024 and the need for insurance carriers to drive rate, connected to the view of loss trend versus rate adequacy. The need for a significant improvement in reinsurance terms and conditions, whether ceding commission reductions, XoL rate increases or structural change, will be another theme throughout the conference. The final major topic for me is around the quality and the transparency of reinsurance data, which has deteriorated in recent years.

What casualty trends are you seeing in the market?

Complexity and uncertainty in the casualty market are as high as they’ve been in probably two decades. 2022 was the peak of the hard market in casualty and what we’ve seen in 2023 is rates slowing down quite considerably, particularly in public D&O, because of excess supply. Our view is that 2023 and 2024 will deteriorate compared with 2022 and that loss trends are going to exceed what we expect in terms of rate change.

In the primary market, since 2019 when we started to see the hardening occur, clients have talked about discipline. However, we’ve started to see some early signs in certain pockets of limit expansion. I wouldn’t say we’re back to seeing lead umbrellas of $25m but we’ve certainly seen $5m limits becoming $10m, or $2.5m becoming $5m. It’s not a trend yet but our concern is that the more we see this, the more it’s going to drive that softening of the market.

There’s also a lot of conversation about prior-year deterioration, particularly for the years 2019 and prior. A big part of that is social inflation, which is picking up. This all underscores the need for insurers to continue to drive rate.

How is inflation impacting the casualty market?

Data shows us that both social and economic inflation drive up claims of all sizes and I would say it drives them up beyond expectations. With social inflation, there’s a lot of focus on nuclear verdicts but those attritional, smaller losses that have increased dramatically in recent years are just as much of a concern. The general slowdown in social inflation during the pandemic gave a false sense of confidence but now that’s starting to catch up.

Carriers have been mitigating social inflation by driving rate and managing capacity by reducing limits and shifting attachment points. While these are good and much needed actions, you can only pull those levers so far. That’s where we need tort reform, but I think we’re a long way from any meaningful change.

Where do you see quota-share ceding commissions heading?

Many commissions are in the mid-30s. Their future direction depends in part on primary carriers’ motivations. Some carriers purchase reinsurance on a discretionary basis and care more about commission overrides. For others reinsurance is a key part of their volatility/capital management strategy. Although these more recent years during the hardening market are generally expected to be a good period for the industry, reinsurers have not benefited to the same of extent as insurers because of these commission overrides. Since late 2022 and extending throughout 2023, we have seen a moderate level of ceding commission reduction on deals that have been loss impacted or where rates have reduced significantly. . Our view however is that longer term, if you think about the sustainability of the reinsurance market, the figure needs to start with a 2 for both liability and financial lines treaties.

What are your thoughts around data quality and transparency?

Claims data is often stale and out of date and information that allows us to evaluate the frequency and severity of losses is frequently missing. In casualty, with social inflation and other trends that are occurring it’s important to have that information. On actual loss performance, many insurers are generally reluctant to get into too much of a conversation, in contrast to other lines of business, where there’s a greater openness. The market is evolving very quickly, and you want to have as recent a view of the performance of a book as possible. Where there are gaps in the data or ambiguity as a reinsurer you are going to have to make assumptions, and that will impact pricing and ultimately capacity. Our view is to encourage more transparent dialogue with clients with a goal of strengthening the partnership in the process.