Pandemic claims to propel rate momentum, says Chaucer’s Head of U.S. casualty

Losses are expected to drive pricing improvement but social inflation concerns abound, says Mike Clifton.

By Mark Richardson, London Editor

COVID-19 could well exacerbate the frequency and severity of U.S. casualty losses. The class began experiencing meaningful upward pricing momentum last year, spurred by increasing jury payouts and campaigns like #MeToo increasing risk exposure by raising awareness of past improper practices.

The market had been waiting 12 years for this type of rate movement, according to Chaucer’s Head of U.S. Casualty Reinsurance Mike Clifton. With the additional impact of the pandemic this year, however, he says the market currently remains underpriced to generate a good return on capital.

“The market has been losing ground on rate adequacy for years,” he says. “The adequate margins that existed five years ago have been slowly chipped away at since then.”

The market has historically relied on investment income in U.S. casualty, and with yields far off where they used to be, he says this is also causing firms to recalibrate and seek real underwriting profit.

Chaucer has significantly scaled back its U.S. casualty account since 2014 in response to the soft market conditions and in particular reduced its exposures in areas like D&O where Clifton believes the industry failed to keep pace with increasing exposures.

However, with the increase in demand and subsequent increase in rates, Clifton expects the 2020 premium forecast to beat 2019. This trajectory is expected to continue into 2021.

The implications of the pandemic, particularly a potential global recession and an increase in insolvencies, is likely to lead to an uptick in D&O and liability claims, with the U.S. being one of the most litigious geographies. 

“We have seen a large increase in frequency, particularly in D&O, and should more businesses run into trouble there may be more shareholder class actions and resultant activity,” Clifton explains. “That also has a ripple effect into other areas; into E&O (errors and omissions) and claims against accountants and lawyers – professions that support a lot of businesses in the U.S. – and which might see a lot of litigation as well.”

Applying further pressure on rate are continued social inflation trends, where the severity of verdicts is increasing.

The surge in large payouts preceded the coronavirus, and Clifton says that the value of out-of-court settlements has also subsequently increased among firms looking to preserve their reputations.

What’s more, bad press around the insurance industry’s refusal to pay certain claims during the COVID-19 crisis, most notably in business interruption, could see the propensity of juries to issue even more hefty verdicts.

“To the average man on the street it looks like the insurance industry trying to avoid paying,” Clifton says. “We know this simply isn’t the case, but sentiment among juries has never been in insurers’ favour and I cannot see this current situation helping that.”

These dynamics could see U.S. casualty reinsurance rates rise by around 10% this year, Clifton says, but reinsurance wordings have also dramatically altered.

The introduction of pandemic exclusions has already been seen at April and the mid-year renewals, but Clifton thinks that wordings will have to tighten further in response to increased frequency and severity to limit losses.

“On the reinsurance side, some of the softer market elements have been in the change in the clause, the event definition, and the sole judge language, where the client is the judge of what an event is. Those wordings are now getting challenged,” Clifton says. “While that won’t be as reflective as rate changes, the removal of these types of words, like 'sole judge,' will have a big impact on the ultimate loss cost in the future.”

Due to the nature of casualty, it could be years before the actions of today are reflected in the market results.

But Clifton says that with these adjustments being seen in pricings and wordings are encouraging and offer hope that this class will begin to offer a more respectable return on capital in the coming years.