Liberty Mutual adapting casualty risk appetite to combat legal system abuse

By Michael Loney

March 10 - (The Insurer) – Liberty Mutual’s management has said the insurer continues to take actions to adapt its risk appetite in response to legal system abuse such as avoiding certain risks and closing claims more quickly.

On an earnings call on Thursday, Neeti Bhalla Johnson, executive vice president and Global Risk Solutions president at Liberty Mutual, said that the challenges of legal system abuse have not abated, which is hitting U.S. casualty business.

Liberty Mutual recorded an 8.4% renewal rate increase for casualty in the fourth quarter, compared with 8.8% in Q3 2024.

“We continue to see an increase in litigation rates and heightened loss trends across the U.S. casualty market,” she said. “While we may not share the optimism of some peers, we view the current market as responsive to loss cost trends.

“Auto, umbrella and excess had strong rate change throughout the year in the mid-double digits and primary general liability rate change accelerated in the second half of the year, reaching low double digits.”

Bhalla Johnson said legal system abuse is having the greatest impact on excess and umbrella, through increasing loss trends and the leveraged impact of lengthening loss development in the primary coverages.

“It is critical for casualty pricing to keep up with loss cost trends, and we must remain disciplined while also engaging with clients on mitigation,” she said.

“In addition to rate, we continue to take actions to adapt our risk appetite to the realities of the legal system abuse landscape while maintaining our commitment to our primary umbrella and excess casualty product offering.”

Bhalla Johnson said that Liberty Mutual will only grow in lines with appropriate risk-adjusted returns and is taking “decisive actions” in the areas of its portfolio where returns are not up to par.

Liberty Mutual president and CEO Timothy Sweeney said that tort reform is needed.

“We need to make policymakers know that this is a tax on their constituents and a tax on the businesses in the U.S. And so we are constantly out with our public affairs folks talking both at the state level and at the federal level to get some change here,” he said.

“But sadly, change doesn't usually happen until there's a crisis, and we've had a couple of crises recently, and that tends to lead to a little bit of change.”

Sweeney noted “pretty good reform in Florida” and “some hopeful bills passing through the Georgia legislature right now around tort reform”.

“And so we need to continue to push policyholders to get a lid on this thing. In the meantime, it's going to lead to both businesses and individuals having trouble getting insurance and having trouble being able to afford that insurance in certain places unless a broader solution is handled,” he said.

Sweeney said that Liberty Mutual is avoiding risks where there are “unhealthy legal situations or legal environment”, and adjusting its claims processes to close claims more quickly “so that cynical attorneys cannot take a small run-of-the-mill claim where we, of course, are going to make our policyholder whole and cynically turn that into something that it's not”.

Bhalla Johnson said tackling legal system abuse “is a knife fight”.

She noted that commercial auto bodily injury claims tend to stay open twice as long if an attorney is involved and the severity is six times higher than a comparable claim.

“And then if the claim is litigated, that same claim stays open four times as long and the severity tends to be 12 times higher,” she said.

‘POSITIVE BUT DECELERATING PRICE INCREASES’

The executives were speaking following Liberty Mutual reported its fourth quarter operating income increased 59% to $1.76 billion, with a combined ratio of 91.5% that compared with 95.1% in Q4 2023.

On the earnings call, Bhalla Johnson said that in 2024, “our loss cost trend was mid-single digits, with North America trends more elevated than those internationally”.

“While the pricing cycle isn't one size fits all across lines and geographies, the industry is seeing positive but decelerating price increases, which stand in contrast to sticky, high and more uncertain loss cost trends,” she said.

Liberty Mutual’s aggregate pricing change excluding the impact of sharing economy business was 4% in the fourth quarter and 5.4% for the year.

“Property rates have decreased throughout this year, though we still believe the line is rate adequate,” Bhalla Johnson said.

Liberty Mutual’s specialty lines continue to soften because of continued competition, driven primarily by cyber and D&O .

“Excluding financial lines pricing, which includes renewal rate change and exposure trend, specialty pricing is generally in line with loss cost trend,” Bhalla Johnson said.

When asked about the impact of U.S. president Trump’s threatened tariffs, Sweeney noted they are inflationary and would particularly affect Liberty Mutual’s consumer business through higher prices for lumber, auto parts and labour for construction and auto repairs.

“We've modelled that out pretty extensively into different scenarios. I wouldn't say worst case, because who knows what worst case is, but we're really talking about 3 to 4 points of combined ratio impact on our consumer business if tariffs lead to another spike in inflation,” he said.

He added: “A three to four point combined ratio risk is much more palatable when your starting point is at a 93% combined ratio than when it's at a 101% combined ratio. We have a much, much stronger starting point than we did two, three years ago.”