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Reinsurers continued to provide ample casualty reinsurance capacity through the recent January 2025 renewal season – despite concerns about adverse reserve development — however, an availability crisis could be looming, AM Best cautions.

In a new report, AM Best points to rising litigation costs, higher jury awards and a broader interpretation of policy coverage – driven particularly by U.S. social inflation trends – which have placed substantial pressure on many global reinsurers to reassess pricing models and reserve adequacy.

Indeed, in 2024, many global reinsurers reported reserve strengthening efforts to combat adverse development, according to the AM Best report, titled “.”

The question is whether premium rate increases can outpace social inflation loss trends. US reinsurers with a casualty reserve portfolio that gain 8%-10% in rate increases are not keeping pace with loss cost trends, while markets that are pushing 15%-20% rate increases will be the ones that could overcome these challenges, said AM Best, citing comments made by panelists .

Casualty Market at Crossroads

The problems with adverse loss development are not anticipated to slow in the near term and the underlying business will continue to deteriorate as social inflation drives up loss costs. As a result, the casualty market is headed for a crossroads, the report affirmed.

“A few years ago, the property reinsurance market underwent dramatic changes and has since performed generally well through active loss years. But the casualty issue is much more complex and cannot be resolved through simple changes to attachment points or underlying terms.”

Insurers and reinsurers are playing catch-up with rates and many companies say they will continue to get strong rate increases, despite these loss trends, AM Best said, posing the relevant question: “When is enough going to be enough?”

Property vs Casualty

“Casualty reinsurance, for the most part, is driven by quota share contracts. Thus, reinsurers rely heavily on ceding insurers to deploy prudent measures to combat these trends, with minimal tools on their end to fix troubled accounts,” the report explained.

While some reinsurers indicated that they would be scaling back casualty exposures in upcoming renewals, capacity remained abundant during the January 2025 renewals “and there was no talk of hardening rates or dramatic shifts in terms and conditions,” AM Best said.

“Reinsurers have apparently not had the same sense of urgency they did just a few years ago with property lines. The lack of urgency could be driven by several factors, but it likely begins with investor sentiment,” the report continued.

Investors Favor Casualty Lines

AM Best explained that the reinsurance market is often influenced by investor appetite and investors appear to prefer casualty lines.
“In 2022, the lack of investor willingness to absorb property market volatility on traditional reinsurance balance sheets led many reinsurers to reduce their capacity for higher volatility property lines. Much of that capacity was redirected into casualty lines, which the equity markets appear to favor.”

AM Best examined publicly traded reinsurers’ stock prices over the past 20 years and found that reinsurers with higher allocations to casualty lines saw a higher average yearly increase in stock prices compared with those with higher allocations to property lines.

“Additionally, those with higher property allocations generally traded at lower price-to-book value multiples over the same period.”

ILS Investors

This data contrasts with the drastic expansion over the same period of the insurance-linked securities (ILS) market, which writes property lines coverage almost exclusively, the report said, noting that ILS vehicles provide investors with “customized levels of volatility, for a shorter time frame than may be available in traditional reinsurer/start-up models.”

It is becoming more evident that ILS vehicles “can offer investors similar, or even superior, levels of return on risk capital for property reinsurance business,” it added.

“What they struggle to compete with traditional reinsurers on is casualty lines, owing to the longer-tailed nature of the business, which can trap capital and lead to uncertain investment horizons,” the report said. “Therefore, investors’ only access to casualty business is by investing in traditional reinsurers, which drives their value up as they write proportionally more casualty business.”

Topics Reinsurance Casualty