Liabilities: Smooth sailing, but hazards on the horizon

Casualty remains profitable

Standing on the bridge of the good ship Casualty, do conditions look set for a smooth passage through the forthcoming renewal season? This is certainly the case for international insureds, but for clients with U.S.-domiciled and U.S.-exposed risks, the waters remain somewhat choppy.

After seven years of consistent losses, positive underwriting results, and a return to underwriting discipline, have made for two years of profitability and stabilization in headline capacity.

There could be trouble ahead: The biggest concerns for casualty insurers

Social inflation and claims reserving adequacy are currently the biggest concerns for casualty insurers.

Social inflation continues to impact loss ratios and reserving concerns

While economic inflation has eased globally, moderating the cost of reinstating property losses, social inflationary pressures continue to drive increases in liability awards.

According to the Swiss Re Institute Sigma report No 4/2024, Litigation costs have driven up U.S. liability claims by over 57% in the past decade.

This trend is most prevalent in the U.S., however Canada, Australia, U.K., Germany and Japan are all seeing notable increases in claims severity, primarily driven by social inflation.

Casualty insurers have been bolstering their reserves, particularly for the period 2015-2019 where low rates and deteriorating loss ratios had caused concern.

U.S. casualty insurers have most markedly strengthened their balance sheets although action among the European/international-focused insurers has been more muted.

Lloyds increased its casualty reserves by 8.5% for the period 2019-2022 but there is continuing concern regarding deterioration in more recent years. Current rates, even after several years of readjustment, may not be sufficient to counterbalance continuing social inflation trends.

The average casualty claim value has increased

Loss frequency has been relatively low, but some larger claims are having an impact.

The energy casualty market has recently experienced a number of specific examples of claims deterioration, particularly in Latin America and the United States where initial claims demands of $100-200 million have risen to close to or above $1 billion. This, and the average increase in casualty claims awards generally, has led to a reappraisal of rating and line size on the higher excess layers of programs that were previously considered lower risk.

Increasing litigation around products liability, personal injury and environmental liability has led insurers to tighten up on certain aspects of policy coverage.

Exclusions include: exposure to “forever chemicals” most notably per-and poly fluoroalkyl substances (PFAS); climate liability; and a focus on the definition of mental anguish following out-of-control claims in the U.S.

Prepare for renewals with three key actions

1. Avoid unnecessary premium loading
2. Address ESG issues with a credible transition plan
3. Invest in analytics to avoid underinsurance

Download the full report to find out how to move forward in a three-speed market, and how to navigate the complexities of exclusions and U.S.- exposed risks in the domestic and international markets.