Lockton Re has published a new report that examines indicators suggesting that the US casualty re/insurance market may be nearing an end to additional reserve strengthening for recent soft market years, impacting the outlook for 2025 renewals.
According to the report, after five years of reserve strengthening, re/insurers may be close to moving past adverse development from the 2014-2019 soft market accident years (AYs).
The data indicates that the 2020-2023 hard market block has a favorable outlook, suggesting potential relief from adverse development in calendar year (CY) 2025 results, which often drive market appetite and pricing behavior.
The report anticipates that, from a reinsurance perspective, downward pressure on ceding commissions in US casualty treaties could ease over the next 12 to 18 months. By 2025-2026, ceding commissions may begin to rise as reinsurers observe sustained market corrections, strengthening the US casualty sector’s overall position.
For the soft market years (AY 2014-2019), the report’s analysis of Schedule P data on Other Liability Occurrence (OLOCC) and Other Liability Claims Made (OLCM) reserves indicates a turning point in additional reserving requirements.
Based on a chain ladder analysis, ultimate losses for OLOCC are projected at $134.9 billion, compared to the $135.4 billion booked by the industry as of year-end 2023. OLCM analysis suggests ultimate losses of $70.5 billion, against $72.3 billion booked.
While this suggests some reserve redundancy, there is potential for continued tail lengthening, although significant anomalies appear unlikely, with projections near $135 billion for OLOCC and $71 billion for OLCM for AYs 2014-2019.
In contrast, the more recent hard market block (AY 2020-2023) carries higher uncertainty, with social inflation pressures counterbalanced by improved terms, higher premiums, and reduced inflation expectations.
Actuarial analyses suggest that OLOCC reserves for these years are adequate, with some redundancy for OLCM. However, industry caution remains, and reserve levels may lean conservative as claims are adjusted over time.
The report suggests that reduced inflation expectations may lower tail-year development in this period’s accident years, and recent loss patterns may allow claims adjusters to set reserves more precisely, limiting development on known claims.
Following several years of reserve inadequacy, a more conservative approach to case reserves and incurred but not reported (IBNR) estimates may prevail for these recent years.
Looking ahead, reserve adequacy for other liability lines is likely to impact the re/insurance market, with calendar-year results influencing pricing and underwriting appetite across lines of business. For excess casualty, years of double-digit rate increases may start to stabilize or decline, though social inflation may keep rates elevated for a time.
Public directors and officers (D&O) rates could soften in 2025 as the 2020-2024 years show favorable development. Additionally, easing downward pressure on US casualty reinsurance ceding commissions over the next 12-18 months may lead to increased commissions by 2025-2026 as recent industry corrections show positive results for the sector’s long-term stability.
Mark Braithwaite (pictured above), co-head of US casualty and financial lines at Lockton Re, stated that despite prevailing negative sentiment in the industry, Lockton Re sees an inflection point on the horizon.
“By definition, it’s always difficult to predict a change in industry trends, but reading between the lines, it feels like we are about to put the sins of the past behind us and enter the next phase of the market cycle in US casualty lines. This, of course, has implications for both buyers and sellers of reinsurance as we look ahead to 2025 renewals,” he said.
Emily Apostolides, co-head of US casualty and financial lines at Lockton Re, highlighted that re/insurer strategies are heavily influenced by calendar-year results.
She noted that as the industry progresses from a period marked by adverse reserve development, market behavior is likely to adjust in response to this shift in the reserving cycle.
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