Casualty reinsurance could reach tipping point if legal trends fail to stabilise: AM Best
According to AM Best, a credit rating agency and data provider specialising in the insurance industry, unstable legal trends in the US could cause casualty reinsurance to reach a tipping point where pricing no longer compensates for the volatility.
In AM Best’s recent reinsurance sector report, analysts highlight how legal system abuse has disrupted pricing and reserving for casualty business, noting that concerns persist among global reinsurers regarding adverse development in US casualty books.
AM Best explained, “While the majority of reinsurers have reported favourable prior year development over time as ongoing casualty reserve strengthening has been offset by strong favourable development on property and specialty lines of business, the industry remains challenged by unpredictable jury awards, broader interpretations of liability, and a lack of meaningful tort reform.”
This has led reinsurers to respond with price increases, stricter terms, and targeted capacity reductions. However, since the problem persists, in many jurisdictions, the ratings agency warns that capacity has not been withdrawn to the extent necessary to force political or legal reform.
Consequently, volatility persists, and long-tail exposures continue to be a drag on earnings through adverse reserve development, even as reinsurers become more selective in allocating capacity.
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AM Best also stated that while many of the concerns around social inflation and loss reserves have focused on soft market accident years of 2015 through 2019, substantial adjustments made on more recent accident years in 2024 provide further cause for concern.
Despite challenging conditions, AM Best notes that investor interest in casualty remains strong, given its lower correlation to property catastrophe risk and the opportunity to invest float over long horizons. Historically, there have been higher multiple casualty reinsurers traded in comparison to property-focused reinsurers. Recently, this trend has tightened due to expected growth among property-heavy Japanese re/insurance groups, which has driven up their multiples materially.
“If legal trends do not stabilize, casualty reinsurance could reach a tipping point where pricing no longer compensates for the volatility. Until then, reinsurers will continue navigating the line between opportunity and fragility,” warns AM Best.
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