Scor’s Nudo: Reinsurers not being compensated for heightened US liability risk
A deteriorating US tort environment, loss trend inflation, prior year development and flattening or reducing primary rates are all taking their toll on the US casualty market.
Nick Nudo, chief underwriting officer for Scor US P&C treaty, does not believe reinsurers are being adequately compensated to assume the heightened risk.
His company views the US casualty reinsurance market as having “several major issues that are not being recognised in current reinsurance terms”.
“It feels like the established reinsurers are maintaining their casualty portfolios just for the main benefit of getting access to their clients’ other lines, specifically property cat,” Nudo noted.
Nudo described the US casualty reinsurance market as “crowded”.
Newer entrants are still eager to grow their portfolios, while some established players have “a healthy appetite” for business as they seek to offset some of the volatility within their property catastrophe portfolios, Nudo detailed.
A third group of established markets are scaling back their participation and taking a more cautious approach given the current challenged market environment.
The most challenged segments are financial lines, in particular public D&O and auto, said Nudo.
“In addition, the large Fortune 1000 business that is uniquely affected by class actions and the nuclear verdicts that we’re now seeing all the time, has made this space too volatile,” Nudo noted.
Ceding commission pressure
Other business segments within US liability “present the potential for profit”, Nudo said, although much of this is dependent on ceding commissions continuing to reduce, and primary rates not falling behind loss trend.
“Depending on the line or class of business, primary rate increases need to be close to or above double digit,” Nudo suggested.
“The need to reduce ceding commissions is also there, and we think that this pressure is only going to increase in the short to medium term,” he stated.
Both D&O and excess casualty/umbrella quota shares “are due for some pretty large reductions in ceding commissions”, Nudo said.
“Most public D&O portfolios, or D&O-dominated portfolios, still have ceding commissions in the mid-30 percent range, which need to reduce to accommodate a more equitable partnership between reinsurers and clients.”
Nudo also forecasted that even portfolios with ceding commission in the low 30s “are going to be challenged to come down”.
“When you consider the current US tort and business environment, the pressure to reduce casualty commissions is there to create better alignment of economic interests.” Nudo said.
Forecasted rates under scrutiny
Closer scrutiny on the primary rates forecasted on business covered within casualty quota share treaties is also needed, Nudo suggested.
“In general, we’re seeing more forecasted primary rate misses than we are rate hits, meaning most cedants are not achieving their budgeted rates for 2023,” Nudo stated.
However, clients are being disciplined in how they deploy limits, said Nudo.
“There is thoughtful deployment of capacity and attachments and ventilation. Further, there is recognition by standard markets [that they need] to relinquish their appetite for challenged classes like habitational, and let E&S carriers handle those exposures.”
Standalone cyber stance
With ransomware losses ticking up, the sector is once again reckoning with the challenges of underwriting such a fast-evolving sector as cyber. Scor is adamant the peril needs to be written on a standalone basis, and not within broader casualty or liability treaties, Nudo stated.
“Cyber is a unique market, and it is a unique line of business. It needs to be modelled and PML allocated to it, so it is best not to combine it with a D&O portfolio, or an excess/umbrella portfolio. Those are different lines that need to be analysed and monitored separately.
“Cyber exposures require complex analysis, and terms that are unique to that portfolio and market,” Nudo stated.
Consolidated QS pushback
Scor’s preference to underwrite cyber on a monoline basis comes as large and global carrier clients look to add new portfolios of business into their casualty/liability quota share treaties, Nudo said.
But given that many of the new portfolios which clients are looking to add are new books or challenged ones, cedants are not having much success.
Even existing consolidated liability treaties “are starting to show cracks”, Nudo said, with the challenges within the US casualty insurance market making reinsurers less supportive of such quota share programs.
“The lines that are loss leaders can no longer be covered up by other, better performing casualty lines,” Nudo explained; as a result, ceding commissions should be reduced, or poor-performing lines should be removed.