Social inflation trends cut into insurer margins: A.M. Best

The casualty insurance and reinsurance industry is being hit by adverse reserve development and narrowing margins, driven primarily by U.S. social inflation trends, according to a report Wednesday from A.M. Best & Co.

This may force some casualty insurers and reinsurers to push for further rate increases, the report said.

“U.S. reinsurers with a casualty reserve portfolio that gain 8%-10% in rate increases are not keeping pace with loss cost trends. The markets that are pushing for 15%-20% rate increases may be the ones that overcome these challenges,” Best said.

Rising litigation costs and higher jury awards are generating financial pressure within the casualty reinsurance segment, forcing reserve strengthening measures for some insurers and reinsurers and leading to narrower margins, the ratings agency said.

“Social inflation remains a key driver of casualty loss trends on past years and continues to create uncertainty across the casualty landscape amid negative social sentiment,” Dan Hofmeister, associate director at A.M. Best, said in a statement with the report.

Social inflation refers to the rising costs of insurance claims due to a combination of factors such as increased litigation, higher jury awards, and a broader interpretation of policy coverage, the report said.

Reinsurers also have found themselves facing higher-than-expected claims costs, “necessitating upward adjustments to their reserves,” the report said.

The margin compression and reserving activity has not yet led to any substantial scaling back in available capacity, the report noted.

“Reinsurers continue to offer needed capacity to casualty insurers, despite concerns about potential for development,” A.M. Best said.