Casualty Re ‘Rational’ Despite Likely COVID Whiplash on Social Inflation

A COVID-driven deflation in lawsuit trends is giving reinsurance brokers ammunition to achieve better outcomes for their clients in a hardening casualty reinsurance market, according to an Aon executive.

But brokers and reinsurers agree that a recent respite from the social inflation trends of recent years may be short-lived, Amanda Nguyen, US Casualty Solutions leader for Reinsurance within Aon’s Reinsurance Solutions business, told Carrier Management recently, referring to the prospect of “COVID whiplash” and weighing in with her prediction that a rational market will prevail whether nuclear verdicts and settlements return with a vengeance or not.

Some of the observations and advice she shared is excerpted in an edited version of the interview below:

Q: Prior to the COVID crisis, casualty insurers were all talking about the impact of social inflation on earnings, and some were talking about market hardening in reaction to social inflation trends.

Has the pandemic, or have the interest rate declines associated with the pandemic, accelerated changes in the casualty insurance and reinsurance markets that were already happening? Is there a way to gauge maybe based on the timing what market impacts were from social inflation and what were COVID impacts separately?

Nguyen: The movement of reserves at various companies, the movement of attitude or concern at various insurers and reinsurers, was well afoot before COVID was even a thing. That was something that was certainly bubbling under the surface. People knew something was going on, but they couldn’t quite put their finger on it.

“I think in the industry there is this feeling of optimism that if there is whiplash, then [with] the rate increases that are quite significant, there’s hope that [those] encompass any increases in trend from where we are in 2020 as we go forward.”

[Based] on efforts at Aon and other firms to understand from an empirical perspective what that looks like, we certainly have seen for several years now very large claims coming from areas where historically we saw fewer. We’re seeing the catastrophic verdicts come out of things that are ordinarily thought of as a basic premises risk—whether it’s a grocery store having an adverse verdict or an automobile accident having a very significant one…

COVID seems to be a separate issue, although the data is still quite scant, to be honest, industrywide…Where they overlap has to do with the environment, which is we’re in an environment where either court activity has slowed or courts are closed…Some are reopening, but things are not the way they were before with the ability to move trials through the system…

Given the general economic strain that that process put on lawyers and plaintiffs, they’re seeking an outcome. We have seen, and this is as expressed by many of our clients, a reduction in settlement values, on average, in recent months and a lessening of what they thought a claim might go for in some cases…

There is this deceleration or deflation…Once we have the chance to look back at this COVID period of time, it would not be surprising if we see some type of slowing or lessening. [But] there isn’t a lot of live data at the moment to be able to come to conclusive judgments. So, that impact is a hard one to digest with insurers and reinsurers, and it’s been one that we as advocates for our insurance company clients are being sure to raise with the reinsurers. In fact, they’re often telling us that they’re hearing and or seeing similar outcomes—[that] in the short run we think that there will be some reduction in average number and/or average size of claims.

Q: I’ve heard that as well. I’ve heard the other side of it where people talk about the recessionary environment making plaintiffs and lawyers angrier. And that it may go the other way.

Nguyen: In speaking to clients, whether the day-to-day clients or their boards, I call that the potential COVID whiplash effect on social inflation.

“The great news is that, by and large, while we are seeing increases in reinsurance pricing, whether that’s stabilization or some decreases in ceding commissions or whether that’s some increases in excess rate, it has not been at the same order of magnitude as the original rate increases.

I can’t prove it, but something tells me that the divisions between the haves and the have nots is becoming a broader one in this time when we see that medical outcomes are different. For a myriad of reasons that we don’t need to go into here, medical outcomes are different and the types of jobs that are being cut, at least publicly, seem to be much more impacting lower wage earners, and depending on the studies sometimes it seems to be impacting certain ethnic demographics more than others. I can’t speak conclusively to the studies, but we’ve all heard about it in the press, these things that people are saying are happening.

[And] perception becomes reality in this culture that we’re in where social media is so prevalent and journalism in mass has a large impact on how people think about corporations, government, individuals.

And so, while in the early pandemic days I think people may have said, ‘Wow, thank you grocery stores. Thank you XYZ company. Thank you for being essential. We appreciate you corporations for being essential,’ I think there might now be so much pent-up frustration with the recession.

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What might happen in the future [with] layoffs that are happening at all different companies all over the place, and then people who are getting sick because they were essential—and who knows if anybody could have ever protected people perfectly, right?—there is this perception that sentiment toward corporations might actually flip the other way, back toward the pre-COVID or worse: ‘Look, you corporations are profiting and the individuals working for you are struggling.’

[It’s] going to be really interesting to see how it plays out because juries are made up of individuals who are living in this world with us. What happens in juries, what happens on benches, is an outcome of what they’re perceiving in the world, whether they’ve experienced it themselves or not.

So, we are a little bit concerned about what we will see long term—certainly I’ll say I am, and I think some others at Aon are also.

Q: You mentioned earlier that when you’re advocating for clients, you talk to reinsurers about the current slowdown or the lower values of settlements. Are they coming back with, ‘But, you know, this COVID whiplash is going to happen’? How is the reinsurance market responding to arguments on both sides?

Nguyen: I’ll answer that in two ways. The first thing is [that] not every client but several clients—many clients—have told us they’re observing the deceleration that I mentioned. I would say it depends on the type of insured that you’re serving as to what your long-term concerns are…Among those that are serving larger average insureds, maybe the more national brand names [and] more public companies, I believe that there’s a bit more of the concern about the whiplash.

But they’re also in an environment where, because of everything that was coming up from ordinary loss development and extraordinary social inflation, they have been able to achieve very, very large rate increases for large accounts. I don’t want to speak for these clients, but I think in the industry there is this feeling of optimism that if there is whiplash, then [with] the rate increases that are quite significant, there’s hope that [those] encompass any increases in trend from where we are in 2020 as we go forward.

If you just read some of the public disclosures and some of the things that get published around the industry, some of these original rate increase numbers are massive.

Nguyen also discussed the prospect of pandemic exclusions being added to reinsurance policies to address COVID casualty claims, noting, however, that there have not been a lot of COVID-related casualty insurance claims at this point. (See related article, “Some Reinsurers Will Try Pandemic Exclusions for Casualty at 1/1,” publishing tomorrow.)

Although Nguyen is not involved in reinsurance placements related to workers compensation, CM also asked her about some commentary in Aon’s June/July Reinsurance Market Outlook published in July suggesting that the employers liability coverage part of workers comp was emerging as a potential concern that is being closed watched by insurers.

Said Nguyen, “Employers liability is definitely something that our umbrella clients are underwriting very, very carefully. I’m not going to say they haven’t underwritten it carefully in the past, but I think they’re extra careful because it is a remedy that in this current environment could pose claim activity. So, they are very cognizant of the risks and they’re really underwriting corporate culture, employee safety, practices protocols and monitoring. I think there’s a lot of attention to that—not universally, but I definitely have seen a lot more attention to it.

Reinsurers, by and large, seem to be trusting the clients to do the right thing. It comes up in every umbrella conversation I’ve had, no doubt, because that’s where you would find it. But [with] the reinsurers, it hasn’t been one where anybody’s trying to shun coverage or anything like that. It’s still completely there.

So, when you’re looking at numbers of—I’m just going to throw out a hypothetical—but when you’re looking at an umbrella policy going up in price by 50 to 60 percent, if the trend was going at a certain excess rate last year, and we think it decelerated a little bit this year, even if it kicks up to where it was last year or even adds greater than that, [then with] a plus-50 to 60 percent rate for an account that isn’t performing terribly but that is in an industry where there’s a lot of risk and a lot of volatility, you can see where the hope is coming from overall.

The industry was struggling with profitability overall. Some companies realized it sooner than others, but I think we all knew before the rate increases started in the second half of last year that something had to give, especially in excess casualty and auto liability.

Q: Where a reinsurer is assuming risk from a cedent that has a book that has those umbrella rate increases at 50 to 60 percent, what kind of pricing increases are coming through on the casualty reinsurance side?

Nguyen: So, this is the really great thing about our reinsurance partners: they’re rational and they can do math. By and large, while we are seeing increases in reinsurance pricing, whether that’s stabilization or some decreases in ceding commissions or whether that’s some increases in excess rate, it has not been at the same order of magnitude as the original rate increases we’re seeing in the marketplace. And I can say that that relates to D&O, public and private. That relates to excess and umbrella. That relates to auto liability. It relates to many, many, many lines of business…

“I’m very pleased to say that reinsurers, while they’re having to make sure that they can be profitable, I think they’re quite energized by what they’re seeing in the original rate environment, especially where they’re supporting pro rata programs, and on excess where they feel they can get that coming into the excess.

There are definitely, no doubt, loss-impacted programs [that] are going to see the more challenging outcomes. We regularly see loss-impacted programs having rate increases and sometimes material. It really depends on what’s happening with the original book.

But the thing, I think, that’s most important to take away from a discussion around rate environment in reinsurance is that reinsurers by and large are distinguishing well-performing books from stable books from underperforming books, and differentiating the outcomes.