AM Best: Casualty reinsurance capacity remains strong, but pressures mount as loss costs rise

By Mia MacGregor

Feb 26 - (The Insurer) - Rising litigation costs and higher jury awards continue to exert financial pressure on the casualty reinsurance segment, prompting reserve strengthening measures for some carriers and squeezing profit margins, according to a new AM Best report.

The report states that reinsurers continued to provide ample capacity through the January 2025 renewal season. However, without interim actions to address key pressure points, the casualty segment could face an availability crisis.

A panel discussion during a recent AM Best briefing on reinsurance renewals noted that US reinsurers whose casualty reinsurance portfolios are exhibiting 8% to 10% rate increases are not keeping pace with loss cost trends.

Markets that are pushing for 15% to 20% rate increases may be better positioned to overcome these challenges, according to the report.

AM Best highlighted that social inflation remains a major driver of casualty loss trends, contributing to ongoing uncertainty in the market amid negative social sentiment.

Social inflation is defined as the rising cost of insurance claims due to increased litigation, higher jury awards, and broader interpretations of policy coverage. Social inflation has placed substantial pressure on reinsurers, which AM Best noted has forced them to reassess pricing models and reserve adequacy.

Legal advertising has doubled since 2013, and the AM Best panel noted that litigation funding is projected to reach nearly $31 billion by 2028.

“This questions whether rates can outpace social inflation loss trends,” the report stated.

Uncertainty surrounding overall inflation is another concern for casualty underwriters. While inflation has eased in some regions, two key components, wage and health inflation, have not tapered off at the same pace, according to the report.

In 2024, AM Best noted that many global reinsurers reported reserve strengthening efforts to address adverse development, with some companies indicating plans to scale back casualty exposures in upcoming renewals.

However, despite these challenges, AM Best found that as the January renewal cycle closed, capacity remained abundant, with no signs of hardening rates or dramatic shifts in terms and conditions.

“Reinsurers have apparently not had the same sense of urgency they did just a few years ago with property lines,” the report stated. This lack of urgency is attributed to several factors, but it “likely begins with investor sentiment.”

In 2022, a lack of investor willingness to absorb increased property market volatility led many reinsurers to reduce their dedicated capacity for related business lines. Much of that capacity was redirected into casualty lines, which the equity markets appear to favour, the report stated.

“We examined publicly traded reinsurers’ stock prices over the past 20 years,” said Guilherme Simões, senior financial analyst at AM Best.

“We found that reinsurers with higher allocations to property lines saw a lower average yearly increase in stock prices compared with those with higher allocations to casualty lines.”

The report notes that the reinsurance market reported adverse reserve development on prior casualty years throughout 2024, and these challenges are not expected to subside in the near term.

“The casualty market appears to be headed for a crossroads,” the report stated.

Loss costs are expected to continue rising as social inflation drives up claims severity, according to AM Best.

The January 2025 renewals demonstrated that reinsurers are looking at insurers’ casualty operations more closely, yet insurers have still been able to secure sufficient capacity for their programs, according to AM Best.

As long as insurers can purchase reinsurance for their casualty books, they will continue to write high limits. AM Best warned that “social inflation will continue to vex the industry until some reform takes place.”

AM Best suggested that “reinsurers are incentivised to write more casualty business to grow their business, lower their costs of capital, and leverage their returns.”

However, scaling back casualty books remains a difficult decision for executives, given the financial benefits.

AM Best cautioned that this will become a necessity when reserve volatility becomes so unpredictable that the capital required to absorb it is no longer economically viable.

“If this were to occur, the market could experience the availability crisis that sparks change,” the report concluded.