What Industry Executives Are Saying About Loss Reserves, Social Inflation

Executives at carriers and reinsurers that announced reserve loss charges taken during fourth-quarter 2023, and even at some that did not, 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 recent earnings conference calls.

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.

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 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.”

Markel CEO Thomas Gayner, in his letter to shareholders delivered a 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 ….

“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.”