At carriers and reinsurers that announced reserve loss charges taken during fourth-quarter 2023, and even at some that did not, executives discussed the “problematic accident years” and lines of business, drawing their own comparisons to prior reserving cycles, and specifically focusing on the impacts of social inflation during earnings conference calls. (See related article, “Worst Is Over: Most of Casualty Reserve Hole May Be Filled, Analyst Says,” for a research analyst’s view of the industry reserve position and these factors.)

At Everest Group, where $397 million of releases in short-tail reinsurance and mortgage lines offset $392 million of additions for casualty insurance lines, Chief Financial Officer Mark Kociancic explained the casualty insurance charges.

“The entire industry faces the real impact of social inflation focused on the 2016 to 2019 accident years,” Kociancic said. “Everest is seeing some of these same trends, and we’ve prudently acted on them given the now well-developed loss patterns for those years,” he said, referring to higher severity in general liability and, to a lesser extent, in commercial auto liability.

“This is contrasted with accident years, 2015 and prior, which continue to show strength and stability, and more recent accident years, namely 2020 and onward, where we see the benefit of significant rate increases, limit reductions and targeted portfolio management actions….We will be prudent and let long-tail reserves from those more recent accident years from 2020 onwards continue to season more fully….

“We believe the balance sheet moves we made this quarter have closed the book on the 2016-2019 reserves and put us in very good shape to generate leading returns in the years ahead,” he said.

At Arch Capital, where overall reserves developed favorably, Chief Executive Officer Marc Grandisson responded to an analyst’s question about the impact on reserve additions across the industry on market conditions with a reference to the hard markets that emerged in the wake of the 9/11 attacks and earlier ones.

First, the CEO described the uncertainty inherent in actuarial predictions that were based on loss development histories disrupted over the last two or three years by pandemic-related factors, such as court closures, “and then the bout of inflation.”

Noting that reserve estimates feed into pricing estimates, he said, “There’s a lot of data that’s really hard to pin down and get comfortable with to make your prediction for [where] you should be pricing the business….We’re in a situation where people have lesser visibility about what the reserving will ultimately develop to.” That means are having to adjust pricing “on the fly,” he said.

“Even if you have that information and you make some corrective actions, it still takes a while to evaluate whether what you did was enough—or was what you needed to do,” he said. “We already had a couple of rate increases in casualty starting in 2020,” he said, referring to industrywide actions. “But I think that now we’re realizing that maybe it’s a little bit worse collectively as an industry than we thought. There’s a lot more uncertainty. [And] a lot more inflation, as we all know, certainly, is a big factor.”

“What I would expect right now is people will start refining their books of business. They will try to reunderwrite away from the social inflation-impacted lines. They’ll probably push for rates. Some of them might kick some business to E&S until such time as we have more stability in the reserving [and can see] how the loss emerges as it relates to what your initial pricing assumptions were.”

In casualty, he said, “it takes several years,” giving the historical context of the 1980s and late circa 2001 hard market. “Even [in] the 1999 or 2000 to 2003 [time frame], it took three-to-four years from the start of that, even in the middle of it, to really get clarity.”

“The market got much harder, in fact, in 2004 or 2005 than it was in 2002—just because you have [take] action” in response to observed trends and then, wait to see whether or not “the actions did what you thought.”

“That’s what we are, collectively as an industry, going to go through” now, he said. “We’re seeing it with our clients. That’s really what’s happening,” he said.

At Markel, where results included $104.7 million of favorable prior-year development overall for insurance business and $57.1 million of unfavorable prior-year development for reinsurance business, executives described $330.7 million, or five points of adverse development, for the general liability and professional liability insurance product lines in some detail. Echoing Grandisson’s discussion, they talked about conservative posturing needed on recent accident years until they get more clarity.

“Beginning in the latter half of 2022, select lines within our U.S.-based general liability and professional liability portfolio have been impacted by consecutive quarters of increased frequency of large claims and unfavorable loss cost trends, resulting in consecutive periods of adverse development, primarily on the 2016 to 2019 accident years,” Markel said in a media statement about 2023 financial results.

“The impact of economic and social inflation, including the rising cost to adjust and settle claims and the impact of more pervasive litigation financing trends, has contributed to the loss cost trends leading to these higher than anticipated losses in older accident years for these product lines over the past several quarters,” the statement continued.

The Markel statement went on to highlight specific factors contributing to reserve strengthening including” a longer-than-initially-anticipated tail on casualty construction lines, a greater propensity for limits below Markel’s attachment point to erode on excess and umbrella and E&O books, delayed claims reporting associated with court closures and claims backlogs arising from the COVID-19 pandemic, and aggressive tactics by the plaintiffs’ bar.

All of these factors “resulted in significant strengthening of reserves on the impacted lines, including on the 2020 to 2022 accident years, where we determined that the incurred loss trends are following a similar loss development trend at the same stage as older accident years,” Markel said.

More recently, the Markel’s annual statement, CEO Thomas Gayner, in his letter to shareholders delivered this summary of social inflation, reminding readers of social inflation’s impacts on older hard markets during the 1970s and 80s liability crises—and prophesying a temporary end to what he views as a cyclical phenomenon.

“Social inflation (the ‘new new’ term for loss trend) is a recurring cycle in the insurance industry. As was the case in the inflationary environment in the U.S. in the 1970s and early 80s, spikes in legal costs and jury awards, fueled by factors such as litigation financing, are pushing total loss costs up dramatically.
“At that time, the asbestos crisis was the headline phrase that provided a shortcut description of spiraling loss costs. Today, it’s called social inflation….

“The problems of social inflation can and will be solved. It will take time and compromise to stabilize the markets, but that will happen,” Markel CEO Thomas Gayner wrote in his letter to shareholders in the company’s annual report.

“Just as occurred in the wake of the ‘insurance crisis’ of the 70s and 80s, things like ‘Tort Reform,’ ‘Loser pays,’ changes in laws regarding liability, changes in limits of insurance coverages, and other forces coalesced to get the ‘inflation’ of that time under control.

“Today strikes me as a similar rebalancing era….This is not new. The problems of social inflation can and will be solved. It will take time and compromise to stabilize the markets, but that will happen,” he wrote, referring to “ongoing actions in bellwether states like California and Florida [that] will demonstrate how we can find a way forward to improve and rebalance insurance markets.”

He concluded: “We need functioning and balanced insurance markets to keep our economy on track. It’s a ‘must happen’ and it will come to be.”

Related article, “Worst Is Over: Most of Casualty Reserve Hole May Be Filled, Analyst Says