In early June, Ken Brandt, chair, president and chief executive officer of TransRe, sounded the alarm on brewing troubles in the liability reinsurance market that could spill over into a full-blown crisis in a couple years.

During an onstage interview at S&P Global Rating’s 40th Annual Insurance Conference, Brandt cited three disconcerting factors in his negative forecast: higher than expected U.S. casualty losses from the 2014-2019 soft market period, a potentially insufficient market correction in the 2020-2022 period that followed, and inadequate Q4 2023 reserve charges by some reinsurers. “If those bad years are as bad as we think they are, you don’t get out of that with just one reserve adjustment in one quarter in one year,” Brandt said. “I think that we have a serious issue.” (Related article: “Liability Reinsurance Crisis Could Be Looming, CEO Says“)

This issue is driven by reinsurer exposure to U.S. casualty losses, which in turn is attributable to seven-, eight- and nine-figure liability litigation verdicts. “This is the No. 1 issue that [European reinsurers] talk to me about: It’s U.S. casualty—their exposure to the U.S.” Brandt said in his interview with S&P Global Ratings Director Taoufik Gharib. “The [losses from the] ’14 through ’19 accident years, or ’15 through ’18—wherever you want to characterize the last soft market for U.S. casualty—are horrendous… We knew they were bad years. It wasn’t a surprise, [but] it’s exceeding our worst-case scenarios.”

Carrier Management reached out to more than a dozen reinsurers and reinsurance brokers to find out if they shared Brandt’s perspective. The two reinsurers and two reinsurance brokers that provided interviewees echoed his concerns, although they held back on forecasting a liability reinsurance crisis in two years. Ratings agency AM Best also provided perspective on the matter. “What the market is seeing in terms of average settlements and verdicts leads me to believe there is still some adverse loss development in those [2014-2019] accident years,” said David Blades, AM Best associate director.

Irrespective of whether a full-blown liability reinsurance crisis is likely to happen, the interviewees said the following market factors present a troubling scenario:

• Higher than expected adverse loss development during the 2014-2019 soft market period.
• An insufficient market correction in 2020-2022; higher premiums charged by primary insurers for casualty lines are not enough to offset prior and prospective losses.
• The impact of these factors is compelling reinsurers to significantly reduce cedent limits, which is challenging carriers to develop seamless and comprehensive towers spreading risks among participants.
• Uncertainty is growing over the insurance industry’s liability for PFAS and PFOS “forever chemicals,” in addition to prospects for lower interest rates ahead. (High interest rates lifted insurer investment income the past two years, compensating for gaps in capital reserves to pay claims.)
• The meteoric rise in “nuclear verdicts” and the growing popularity of litigation funding practices, if left unchecked, will exacerbate difficult liability market conditions going forward.

These factors are impelling larger corporations to assume more liability risk net, via captives and other self-insurance vehicles, several interviewees commented. “We may come to a point where certain things might simply be uninsurable; we just don’t know,” said Beatrice Morley, global head of casualty and head of international at Aspen Re. “The only thing going for us at the moment is that the market is quite disciplined, with no rogue players doing silly stuff at the last renewal.”

“What reinsurers did in casualty during the [2020-2022] market correction didn’t get the press that the property market got over the same period. It should have.”

Amanda Lyons, Aon

Amanda Lyons, global head of product and executive managing director at Aon’s reinsurance solutions, also expressed concern over the future of the liability reinsurance sector. “I worry about a crisis, not in reinsurance availability but what is reinsurance’s ongoing value,” she said.

Lyons said that over the past few years, insurers did all they could to significantly decrease limits, drive rate and become more organized against the plaintiff bar, but “carriers are fighting with one arm tied behind their back,” she said, inferring that reinsurers are doing the tying. “With adverse development now coming from the soft market years, what else can insurers do? I completely understand that reinsurers need to price for the risks they’re covering, but then we may be facing a need to create different liability reinsurance products that provide value.”

Courting Disaster

The locus of most concerns about the liability reinsurance market is the soft market for many casualty products from 2015 through 2019. Using data from S&P, Swiss Re commented in its State of the Reinsurance U.S. Liability Market report in July that the U.S. liability market’s loss ratios during the period exceeded 70 percent, approximately 8 to 10 points higher than anticipated. The reinsurance market fared worse; Swiss Re noted that ceded loss ratios were 5 percent higher on average than direct loss ratios over a slightly longer 2012 to 2019 period. “We’re seeing a much higher frequency of large claims affecting casualty and reinsurance disproportionately,” the report stated.

Despite double-digit rate increases the past four years on many liability lines, loss trends continue to creep up, said Aspen Re’s Morley. “2020 to 2022 was an extremely hard market for casualty, [generating] rate increases and tightened terms and conditions that some people in their careers had never seen before,” she said. “We’ve had four years of the rate increases now, but loss trends have not gone down.”

Morley held up her hands in the Zoom interview to describe two rising planes, one ascending at a higher slope than the other. “The rates are going this way, but the loss trends are going at a sharper incline,” she said. “The question is, ‘How long will this continue?'”

Brandt had the same perspective on the 2020-2022 market correction in his June comments. “All the policy limits came down in the U.S., compressed a lot, which was good. Prices went way up, terms tightened up,” he said. A year ago, many reinsurers, including TransRe, felt the underwriting and pricing corrections were sufficient. “We thought these are going to be solidly, if not terrifically profitable years.” Yet, this may not be the case, he said, citing “claims emergence coming from those years way too early.“

“We’ve had four years of the rate increases now, but loss trends have not gone down.”

Beatrice Morley, Aspen Re

The worst-performing liability lines for insurers and reinsurers (in no specific order) are U.S. commercial automobile, umbrella, excess casualty, general liability, directors and officers (D&O), and cyber, interviewees contended, explaining that the risks were underpriced during a period when both social inflation and litigation funding increased.

Armed with plentiful capital as pandemic-weary juries returned to courts, plaintiff attorneys targeted D&O liability and commercial auto liability for big wins, Lyons said. “Once tort reform was enacted in 2007 and 2008, there was a clear shift in the plaintiff bar where attorneys targeted D&O and commercial auto, which is where you now see these incredibly large verdicts,” she said.

Chris Ross, managing director and casualty team leader in the New York office of Guy Carpenter, also commented on commercial auto liability. “It’s definitely a driver of some of the severity we’re seeing—not the thermonuclear-type claims but definitely an increase—making it a primary class of business that’s difficult to write,” he said. “A lot of umbrella and excess casualty losses have been driven by commercial auto over the last five years.”

Ross said the greater frequency of severe losses due to high-dollar judgments has spiked price increases in excess casualty. “Demand has stayed high and supply has contracted, increasing the pricing,” he explained.

Cyber liability losses from ransomware and business email compromise claims are more of a cautionary tale. “There’s a whole lot of unknown with cyber, which is wrapped into what we call ‘other liability’ at Best, most of it claims-made policies,” said Christopher Graham, senior industry research analyst at AM Best. “We know that cyber premium increases were about 20 percent each year in 2021 and 2022, tripling from 2019 to 2022. Last year, the premium growth stabilized. …The rate increases seem to be working, but then again, we don’t get to see the tail on that.”

Eroding Limits

Blades said that many casualty reinsurers aren’t “putting out the high limits of the past, getting carriers to retain a bit more. Say, for example, they were covering $5 million in excess of $5 million; now they might be providing $2.5 million. As they look at the losses, a more circumspect approach is being taken.”

“There’s more pressure on cedents to identify their strategy to address U.S. liability exposures [to receive higher limits]; those that do it better will get more preferential reinsurance treatment,” said Morley from Aspen Re.

Lyons agreed that limits are much lower. “What reinsurers did in casualty during the [2020-2022] market correction didn’t get the press that the property market got over the same period. It should have,” she said. “For the majority of our clients by far, the reinsurers pushed them to bring their limits down to incredible lows…potentially leading to losses developing faster up the tower.”

Liability insurance limits that were $25 million and more in the pre-market correction period are now $5 million and $10 million, several interviewees said. Confronted with carriers providing exceptionally low limits, brokers have smaller bricks to build comprehensive towers.

Towers confront other problems: Fearful of high-dollar verdicts, many excess insurers at the top of a tower are allegedly sending so-called “hammer letters” to those at the bottom. “We’re hearing that the upper layers are pressuring those in the lower layers to settle cases, fighting each other to force settlements before they reach up into the tower, whereas in the past they might have gotten away with paying nothing other than the defense costs,” said Greg Richardson, CEO at Greenlight Re.

Legal Matters

The reinsurance interviewees chalk up the market reactions to high litigation settlements and verdicts, in addition to lawsuits capitalized in part by litigation funding firms in exchange for a percentage of the potential recovery. According to data compiled by Marathon Strategies, juries ordered 20 verdicts exceeding $100 million against companies in 2022, including four that were over $1 billion. “Overall, since 2009, 191 of these verdicts were ‘thermonuclear,’ including 48 that exceeded $500 million and 23 that reached above $1 billion,” the research firm stated. A “thermonuclear” loss, a phrase coined by Marathon Strategies, exceeds a $500 million payout.

“We’re hearing that the upper layers are pressuring those in the lower layers to settle cases, fighting each other to force settlements before they reach up into the tower, whereas in the past they might have gotten away with paying nothing other than the defense costs.”

Greg Richardson, Greenlight Re

Swiss Re’s recent liability market overview asserted that U.S. litigation is “fueled by a growing influx of third-party capital,” citing a report by Westfleet Advisors indicating a 43 percent growth rate in the U.S. litigation funding market between 2019 and 2023. “The additional capital enables plaintiffs to pursue more cases, staff them with more experts and lawyers, and extend their lifespan,” Swiss Re stated.

Several interviewees said the capital provided by litigation funding firms is used in advertising the services provided by plaintiff attorneys. “You literally can’t drive 500 feet on a highway in Philadelphia without seeing a billboard with an attorney’s face,” said Lyons. “The amount of money being spent on advertising has to be in the hundreds of millions of dollars…and it explains why [commercial auto] clients have been getting double-digit rate increases for 10 years and more and yet the line is still challenged.”

Once a plaintiff attorney has a client, Richardson from Greenlight Re said they make every effort to play on the jury’s emotions. “The plaintiff bar used to adhere to a protocol and etiquette when speaking to the jury; now, they ask questions they normally didn’t in the past, like, ‘Imagine if you were the victim, what would you do?'” he said. “They try to get the jury emotional, making it potentially more likely they’ll win the high sums they’re asking for.”

Ross from Guy Carpenter is philosophical on the subject. “Until people really start to push back against the high verdicts and the increase in litigation funding, nothing will really change from a tort perspective,” he said. “When businesses can’t find coverage, that’s when the government and regulators make adjustments.”

Lyon echoed these remarks. “We need to drive home to taxpayers and politicians that this is legal system abuse,” she said. Morley agreed, commenting, “If thermonuclear verdicts continue, will a compounded 125 percent premium rate increase be enough? It’s something we’re all grappling with.”

Road to Hell

Emerging liabilities associated with the manufacture, distribution and sale of “forever chemicals” is increasing apprehension over the size and scope of future litigation verdicts, with some interviewees speculating the losses could reach the levels of asbestos litigation. (See related articles: Underwriters Wary of PFAS Amid ‘Superstorm’ of Litigation, Regulation; PFAS by the Numbers: $165B Ground-Up* Litigation Losses Possible)

A more pressing issue at the moment is high interest rates. If they fall, investment income will suffer; if they persist, the lure of cash flow underwriting, “a horrible, horrible road to go down,” said Brandt, may be irresistible. “It’s the road to hell.”

Richardson, on the other hand, is sanguine that markets will remain rational, despite high interest rates. “My hope is there will be more focus on the combined ratio than on investment income,” he said.

Assuming past is prologue, will liability reinsurance devolve into a crisis in two years, as Brandt suggested?

Unlike TransRe’s CEO, Ross believes the fourth-quarter 2023 reinsurance reserve charges are a step in the right direction. “I’m not as pessimistic as Ken’s perspective. I don’t think the reinsurance industry is underreserved in casualty,” he said.

But as Blades from AM Best cautioned, “It remains to be seen whether the reinsurance charges the reinsurers have been getting the past two years will prove to be adequate to stave off problems in casualty reinsurance down the line.”

As time progresses, Lyons said there’s an opportunity for reinsurers to avoid a crisis by tailoring their underwriting treatment—the terms and conditions, attachment points and limits—on a client-by-client basis and not the present broad-brush approach. “The reinsurers that listen to a client story about what they’ve done to reunderwrite their strategy will make the most out of the market,” she said. “That will save you.”