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Casualty E&S Insurance Market: Growth and Loss Remain Focal Points

In 2024, expect carriers to continue to be aggressive on new business while more conservative on renewals.
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casualty e&s insurance market: growth and loss remain focal points

As we prepare to wrap up 2023, the prevailing themes in the casualty insurance market continue to be the push for growth and caution around loss costs and loss development.

The excess & surplus industry is quickly approaching the $100 billion mark in premium and it is expected to grow to $150 billion in the very near future, according to multiple conversations with carriers and reinsurers. A year ago, the common theme of the annual Wholesale & Specialty Insurance Association (WSIA) Marketplace event was the need for underwriters and underwriting talent to keep up with the submission flows and opportunities that carriers were seeing.

This year, most E&S carriers say they are adequately staffed and poised for growth, with several looking at new products or offerings intended to capture a broader range of accounts than typically targeted. Some carriers who typically target larger, more complex risks are creating lower middle market divisions with dedicated underwriting teams.

In September 2022, most carriers had surpassed their underwriting goals for the year. At roughly the same point this year, only about 50% of the carriers had hit their goals for the year. Two factors are driving this trend: additional carriers and rate increases.

Additional carriers have entered the marketplace over the past few years with less deployable capacity available than at the start of 2019. With possibly twice as many excess facilities deploying that capacity, there has been a good amount of competition excess of a $10 million attachment point.

This competition is starting to filter down to a $5 million attachment point with a still-limited number of carriers targeting leads on larger, more challenging placements. This situation is pulling down retention rates across the excess market as agents and brokers strategically work to keep rate increases down as much as possible.

The rate increases most carriers had been targeting for 2023 are much lower than they planned. Most carriers had been looking for 10% to 12% decreases and, while they might be getting this range in the lead, the layers excess of the lead are typically renewing in the lower-single digits.

Also, the quality of submissions continues to be a main point for carriers, as underwriting authority for direct underwriters still hasn't increased to its pre-pandemic levels. The need for a complete submission with detailed operations information, loss information and safety procedures and protocols is still paramount for underwriters as they continue to have to work with management and negotiate for risks that fall outside their direct authority.

A Closer Look at Losses

Supply and demand aren't driving today's casualty insurance market conditions, which was the case in many previous challenging market cycles. Instead, we're seeing a rationalization of pricing based on rising loss costs and the increased rates needed to maintain profitability.

Before 2019, loss costs were developing at approximately 4% annually, according to conversations with carriers and reinsurers. For 2022, that estimate is closer to 6.5%, with several carriers saying they see loss trends nearing 10% per year—which means a $500,000 loss today would be a $1 million loss seven to 10 years from now.

Other drivers include more frequent larger claims and nuclear verdicts, as well as more claimants. These changes, coupled with third-party litigation, suggest excess casualty pricing will need to continue increasing over the long run to keep pace.

However, the positive for buyers is that there is an ample supply of capacity available, which is creating a competitive environment. But while minimizing rate increases in the short run is positive and necessary, if trends continue as they are, we could eventually see an inflection point in which rates would need to go up to work back toward an equilibrium.

What's Ahead in 2024

Ceding commissions are expected to come down three or four points for carriers in the Jan. 1, 2024, treaty renewals with loss development in an expected bandwidth, according to various insurance and reinsurance sources. Carriers with higher-than-expected loss development could be cut even more.

To offset the costs passed onto insureds through the reinsurance market, many carriers increased the amount they take on a net basis. This strategy pushes more volatility onto their books, forcing them to make underwriting guideline changes more frequently as losses develop, compared to carriers who take larger reinsurance lines and can maintain guidelines with continued underwriting discipline.

The COVID-19 litigation recess is clearly over, with nuclear verdicts continuing to increase in frequency and severity. Insureds are looking to reduce capacity purchased to offset rising costs, which could be a good short-term plan. However, from the losses across the industry, conversations around large losses must focus around when, not if, a large loss will occur.

The conversation around growth and losses will continue to evolve, and the 2024 outlook will be clearer after the Jan. 1 treaty renewals. From a pricing standpoint, expect carriers to continue to be aggressive on new business while more conservative on renewals. Terms and conditions will be a focus from the underwriting side, as carriers look to protect themselves while being able to be aggressive from a pricing standpoint.

Adam J. Mazan is vice president, Pacific Region, Risk Placement Services (RPS). Russ Stein is area senior vice president, RPS.

Monday, January 29, 2024
Commercial Lines