Casualty Lines Back Front and Center Amid Social Inflation Crunch

After climate risks and property inflation pushed casualty insurance to the back burner somewhat, it's returned to being "front and center" as the sector grapples with the impacts of social inflation and rising claim sizes, according to AM Best's head of industry research.

Source: AM Best | Published on April 2, 2024

social inflation and casualty lines

After climate risks and property inflation pushed casualty insurance to the back burner somewhat, it’s returned to being “front and center” as the sector grapples with the impacts of social inflation and rising claim sizes, according to AM Best’s head of industry research.

Sridhar Manyem, senior director, industry research and analytics, AM Best, said rising reserve risk is contributing to increased volatility, especially the problems with accident years 2015-2019.

The industry’s net loss reserves remain redundant by about $11 billion even after a $6 billion deficiency for asbestos-related and environmental reserves, he said.

“With the increase in mass torts, with the increase in economic and social inflation, it’s come back front and center,” Manyem said during the webinar, titled AM Best’s Briefing − Casualty: How Insurers are Managing Social Inflation and Mass Tort Risk.

Along with Manyem, panelists included Mia Finsness, global executive underwriting officer casualty at Markel, and Amanda Lyons, senior managing director at Aon Reinsurance Solutions.

“The  industry as a whole is still struggling with the distortions caused by COVID, the return of economic inflation, the return of economic inflation, continued increase in social inflation and court backlogs slowly starting to reopen after COVID,” Manyem said. “At the same time, social inflation has been exacerbated by third-party litigation financing and the recent changes in jury attitudes towards corporations.”

Finsness said as far back as 2018, the industry began seeing large verdicts that inflated costs and it took prominence as an issue the following year.

“It  was the topic of discussion in and into 2019,  and then COVID happened and everything was replaced by that discussion,” she said. “But social inflation certainly didn’t go away.”

Closed courts may have temporarily obfuscated the issue, she said. As a result, the timeline was delayed and now the issue is back with a “vengeance,” Finsness said.

“And I think worse than ever,” she said. “Some of the dynamics leading to the current era of social inflation include just a real hatred of large companies and insurance companies by the public, by the jurors, rising inequality. Just a sense that money is like Monopoly money now.”

At the same time, shifts in the U.S. population have caused some states that historically weren’t known for large verdicts to morph into places
where mega-verdicts are increasingly seen. She cited Georgia as an example, and said the shift has proven to be at times rough for insurers, who may have written policies there five or six years ago.

“Maybe they weren’t charging enough. Maybe they weren’t putting adequate terms and conditions on,” Finsness said. “This is the challenge we have with casualty business is it is long-tail and you necessarily have to be looking in a crystal ball in order to anticipate what the claims are going to look like and how much you need to be pricing in light of that future environment.”

Since as far back as 2014, carriers have worked to bring down limits and push rates, said Lyons. In order to control costs, she said carriers should be more disciplined in determining which cases go to trial and which cases are settled in order to avoid so-called nuclear verdicts.

“In many cases, we see clients that are now at 10 plus years of significant rate increases, many of those in the double digits, and even that compounding rate over a decade has not been able to solve the profitability issue there,” Lyons said.

As a leading cause of insolvency, Manyem said adverse reserve development, and adequacy more generally, is something AM Best will watch.

“An unexpected or larger-than-anticipated changes in an insurer’s reserve position could materially affect our assessment of the company’s balance sheet strength and the enterprise risk management capabilities of an insurance company,” he said.