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Cautious reinsurers hold line on casualty capacity: AM Best 

Reinsurers maintained adequate casualty capacity at the January renewals, with modest price changes, despite concerns about litigation funding’s impact on social inflation and recent reserve strengthening, AM Best says. 

At the same time, reinsurers are cautious about allocating more capital to property catastrophe after maintaining underwriting discipline in the wake of price increases, as it remains to be seen whether they have achieved technical rate adequacy. 

A report from the ratings agency says the trade-off between property catastrophe, which has taken high natural disaster impacts, and casualty reinsurance was a factor during the latest renewal season, but any shift towards casualty comes with its own exposure risks. 

“Casualty lines have been affected by economic and social inflation trends, given the long-tail nature of risks such as general and commercial auto liability, and insurers remain sceptical about future adverse loss reserve development in this segment,” AM Best Senior Industry Analyst Christopher Graham said.   

Third-party litigation funding in the US continues to drive social inflation, with sophisticated plaintiff lawyer tactics contributing to inflated judgments, AM Best says. 

Industry estimates suggest third-party litigation produces an internal rate of return of about 25% for the funding entity, which is generally greater than that available through traditional investments.  

“If investors can achieve this return consistently, especially on investments generally uncorrelated to other financial assets, the practice will continue, driving up loss costs for insurers,” Mr Graham said. 

Over the past decade, commercial auto, general liability, and directors’ and officers’ liability insurance have been affected by social inflation. 

The report says that since the start of covid, poor driving has led to more road deaths even as the number of kilometres driven dropped, with handling of smart devices and driving while stressed or sleep-deprived contributing to roads being less safe. 

“More severe injuries lead to more claims being litigated, opening the door to third-party litigation funding, which ultimately increases loss severity, as sympathetic 
juries pile on punitive damages to corporations,” AM Best said. 

The report also notes cyber insurance is the fastest-growing line of insurance, and demand will continue to rise, which will flow through to reinsurance demand.