What impact will inflation have on appetite and cycle management strategy?
Inflation serves as a factor in how we assess risk and impacts how we should price risk. While market forecasts can offer helpful insight for the months ahead, it’s important to remember that no one can quite put their finger on where inflation will be with total certainty. This year, it remains elevated, and it’s always top of mind because it plays such a significant part in the profitability of business long-term.
As we move into 2024, rate changes are decelerating in the casualty marketplace and although inflation levels are coming down globally, we’re still hesitant with rate changes at risk of no longer keeping pace with economic and claims inflation. As a result, we’re seeking to partner with clients focused on mitigating inflation and its impact on their Ultimate Loss Ratio projections in long tail casualty lines of business.
Claims inflation has risen over the past few years, and we continue to experience adverse development in the market driven by the 2015-19 years. If we examine the prior year development coming through in Casualty, it is clear business was not priced adequately during those years, and loss ratios from those years are trending higher.
Claims inflation was undershot by most players in the market during the 2015-19 timeframe and was driven by the market not picking up on the impact of social inflation. As a lesson from this, we’re focused on ensuring that we have realistic claims inflation assumptions going forward and we don’t currently see any cooling in claims inflation.
On the topic of social inflation, we continue to see that verdicts are getting larger. The frequency of losses has been more stable but is increasing – mapping out a stable upward trajectory. But severity has been where we’ve seen a notable shift and as such, we’re focused on trend assumptions there. When we look at severity as one of the drivers of poor performance in the past, we can see where the market has responded to it. The result is that carriers reduced the limits they put out in the market. For example, in the US, excess liability teams used to deploy $25 million to $50 million limits quite regularly – but today those limits sit between $5 million and $15 million. Additionally, pricing has increased to get ahead of claims inflation trends – and ultimately get the profitability of casualty business back on track.
As noted above, the market has made several corrections, including strong rate change, limit compression, and attachment point increases in response to the social inflation trends. All these moves should lead to improvement in loss ratio expectations going forward, but it is important to note that with the adverse development we continue to experience from 2015-19, the loss ratio ‘starting point’ continues to move higher, which impacts the range of where go-forward expectations are heading.
As we think ahead in terms of a market forecast, we’re keeping a keen eye on these fundamentals of the business to make sure they are still trending in the right direction, where rates stay ahead of claims inflation trends to maintain a certain level of profitability. We’re also monitoring average limit deployments with a goal to support underwriting teams who are focused on keeping limits in check. Rate changes are decelerating in the market, and in certain lines of business have moved negative, therefore we believe ceding commissions will be under pressure in 2024 as reinsurers seek to maintain their expected profitability in the casualty business.
Many in the industry will have heard Chris Killourhy, Managing Director, QBE Re talking about ‘doing more with less’ which for us means going bigger, with fewer targeted clients. My closing thought is that more than ever, QBE Re is well positioned as a long-term reinsurance partner for those with a cycle management strategy that aligns with our own appetite and strategy – and we’re committed to doing even more to support our key clients on a bigger scale.
This article first appeared on 7 November 2023 in The Insurer
