Social Inflation Is Back and Carrier Execs Should Worry: Berkley

October 24, 2019

If this week’s move by Travelers to shore up prior-year liability loss reserves by nearly $300 million didn’t convince carriers that social inflation is something to worry about, the words of W.R. Berkley’s chief executive are another data point.

W. Robert Berkley, Jr.

Robert Berkley, Jr., whose company—unlike Travelers—reported increased third-quarter net income and made no mention of reserve hikes, gave his assessment of a worsening tort environment during a third-quarter conference call Tuesday evening.

“Should people be concerned? In our opinion, the answer is yes. Should people be surprised? In our opinion, the answer is no,” said Berkley, noting that it’s not the first time he has tried to call attention to the changes in the legal environment that are raising claims severity in liability lines.

“We have for two-and-a-half or three years been beating the social inflation drum. We have been talking about what we have seen as much as four or five years ago in commercial auto. More recently, we have been talking about GL [general liability] and much of the professional space as well,” he said, comparing today’s environment to the medical malpractice crisis in the early 2000s playing out now on a broader scale. Then, “we saw a relatively sudden spike in claims activity, severity seemed to spin out of control, and ultimately what eventually came into focus for society was that when you have these type of awards coming out of the legal system, it is society that pays the price one way or another,” he said, noting that consequences included a lack of doctors in some regions, escalating health care and insurance costs. “It is a small data point relative to what we may be seeing [these days] in the broader casualty [and] professional [liability] market,” he said.

At an investor conference in September, Berkley made similar comments, suggesting that a meaningful liability insurance market transition could be brewing and offering analogies to the 2002-03 hard market that followed the 9/11 attacks, and the mid-80s liability insurance crisis.

During the earnings call Tuesday, the specialty insurance company leader focused more on warnings than market turn predictions, also delineating other issues confronting insurers.

“It is without a doubt a challenging moment for the industry….This is a pressurized situation.”

“It is without a doubt a challenging moment for the industry. It is going to be particularly challenging for those that have not been both paying attention and taking action,” he said, noting that low interest rates, frequent natural catastrophes “and then really the big nut out there being social inflation” threaten to squeeze carrier profit margins. “This is a pressurized situation,” he said, although he repeatedly noted that his company will be relatively less impacted by growing social inflation.

The lesser impact, he said, is attributable to the fact that W.R. Berkley’s portfolio focuses on smaller businesses that aren’t usually subject to “headline losses” and the fact that roughly 90 percent of the domestic book is written at policy limits of $2 million or less.

For the third-quarter and the year so far, W.R. Berkley reported income growth—up 2 percent to $165.2 million for the quarter and 10.7 percent to $562.6 million for the first nine months. The top line grew for both periods and combined ratio for both periods was below 94. Gross written premiums jumped 8.6 percent to $2.1 billion for the quarter, and net premiums rose 7.7 percent to $1.7 billion, with workers compensation being the only line with a premium decline (5.8 percent on a net basis).

As for loss reserves, Chief Financial Officer Richard Baio noted that prior-year loss reserves developed favorably by $4 million, or 0.2 loss ratio points.

Asked about the carrier’s conservative reserving practices, and whether reserve additions might come down the road anyway given the level of social inflation, Berkley suggested that reserve surprises aren’t likely.

“What seems to be coming into focus for the industry is something that we started to contemplate some number of years ago…..In part, that is included in the loss picks that we have used in the more recent years, and we’re not uncomfortable” with them.

In addition, he said: “We have 53 operating units [offering] a variety of different products. And ultimately, there’re some places where we’ve gotten the porridge a little bit warm, some places we get it a little bit cold. But in the aggregate, we’re pretty comfortable with where things stand.”

How Long Has This Been Going On? How Long Will It Continue?

Acknowledging that Berkley and some industry researchers have been talking about social inflation for several years, one analyst on the earnings conference call wanted to know exactly when the carrier’s management team started accounting for it in loss reserving exercises and pricing.

Related article: Social Inflation Is Back, Fueled by Lawyer Advertising and Other Factors: Assured Research Analysis

“Depending on the product line, we started noticing something was percolating, give or take three years ago….It didn’t just rear its head all at once,” Berkley said, later noting that the signs were visible in commercial auto five years ago and in other lines, more than two years ago but less than four.

“One of the points that’s worth noting—and we learned this, quite frankly, the hard way with commercial auto—is that the trend moves and it moves quickly,” Berkley said, noting that a strategy of raising rates is an unending game of catch up. “You raise your rates by what you think you need, [and] you feel like you hit the bullseye. The problem is, over the past few years and it continues to be the case, [that] the bullseye is moving quickly,” he said, noting that a better strategy is to address the changes with terms and conditions, attachment points and risk selection.

Another analyst asked Berkley executives to pinpoint a cause for social inflation—changes in politics or society—and asked how long they expect trends to continue to worsen.

William R. Berkley, executive chairman, delivered the response. “Societywise, as we can clearly see in the political process, we’re really seeing a group of people [have-nots] who are fomenting resentment of those who have. We’re seeing in court decisions that make no economic sense—that courts [are] trying to punish people,” he said. “That’s going to continue until people realize that the people who really get punished are the people who ultimately have to buy insurance,” he added.

“The reality of the [legal] system is the decisions are worse. The trends are not going to change. We have a while before you’re going to see a change,” he said, putting the time frame at 18 months on the short end and three years on the longer end of the range.

“People are unhappy and angry and that resentment is coming through in court decisions,” the elder Berkley said.

CEO Rob Berkley summed it up early on the call. “Social inflation is real. It is here, and the industry is beginning to pay attention,” he said.