A pre-renewal reminder of why reinsurer selection is not just about price or ratings

Why understanding how casualty reserve shocks might impact your panel is important too

Stuart Shipperlee video interview with Intelligent Insurer magazine  

Monte Carlo reinsurance conference 2024 

Video Transcript  

From our point of view, given our focus is very much on the financial strength or financial health insurers and reinsurers, probably the big takeaway has been the, not so much out of the blue, but re-emphasised concern about US casualty reserving.   

Historically problems with US casualty reserving over extended cycles have probably been the thing that has tripped up a lot of insurers and reinsurers. History might not repeat but it tends to rhyme, so we're pretty focused on that coming away from Monte Carlo but with a particularly unusual spin that not only is there the concern around social inflation, but possibly other forms of casualty exposure such as forever chemicals emerging (which we understand some of the primary companies are starting to reserve for), so therefore reinsurers will at least think about reserving for them too. The increase in litigation finance as an asset class basically.   

So, as an analogy, if you think of smouldering embers of a problem of a reserve shock in the US, what would pour petrol on those smouldering embers would be lots of money to pursue litigation, and that seems to be happening at the same time. That's not a prediction for next year, we don't know that's going to happen, but again history tells us it's something that could happen.  

The wider context for that, as S&P pointed out in their event at Monte Carlo, the reinsurance industry is extremely well capitalised right now and if you look at it as an aggregate their ability to handle an excessive reserve shock is very high. Using a 20% reserve shock, which is roughly what happened in 2002, on the S&P capital model, the industry’s redundant at AAA capital and they would only be pushed a little way below that.  

However, what also happened in 2002 was that there was a very wide distribution of impact - some people went bust, some people had a the painful experience and some people kind of got through it without too much trouble.  

Our own modelling of the current generation of reinsurers suggests that if there was a reserve shock of that scale the same would happen. We've seen reinsurers with A+ profiles where we put a 25% reserve shock on drop to CCC and we've seen others with A+ profiles where a 25% shock barely moves the dial. Not surprisingly most are somewhere in the middle.  

So whilst the industry has a lot of capital to absorb this, in our opinion the potential for some players, in the event of a significant reserve shock, having real problems is very much there.