Social inflation is leading U.S. reinsurers to report “adverse reserve development,” AM Best financial analyst Cristian Sieria tells the ratings agency’s recent Insurance Briefing – Toronto event. “As a result, we expect reinsurers to see significant increases in U.S. casualty premium rates during the upcoming January 2025, renewal,” he says.

But he stresses the issue’s no longer U.S.-specific. AM Best’s analysis sees rising social inflation in other countries, particularly Canada, the U.K. and Australia.

“In Canada it is said that social inflation contributed to about 7% of total liability claims in the prior year. We’re beginning to see social inflation driven by litigation financing as well,” says Sieria. “So that’s something to continue monitoring going forward, as we expect it to become more prominent in Canada.”

Increasing geopolitical risk is further concern for the reinsurance industry – driven by supply chain imbalances and rising claim costs.

“This risk is especially pronounced in 2024 [due to the] high percentage globally of national elections,” he adds. “Although Canada is not holding its national election in 2024, the country and its market participants still have to look out for this risk, given its relationship with the U.S. and other large countries.”

 

Risk distribution

While AM Best does not produce a Canada-specific reinsurance segment outlook, Sieria says many trends applying to global non-life reinsurers also affect Canada’s reinsurers.

“Although the Canadian reinsurance industry includes large international players that may reinsure risks in Canada, our data set only encompasses AM Best rated carriers that are domiciled in Canada, and this is largely made up of the Canadian branches of larger organizations,” he adds.

Looking at provincial distribution of insurance revenue, he says Ontario makes up a little bit more than half of the distribution. The remaining Top 5 provinces include British Columbia (9.6%), Alberta (8.3%), Quebec (8%), “and then business reinsured outside of Canada as well at 6.8%.”

The ratings agency is also eying risks impacting both reinsurers and primary carriers.

“One of these is wildfire risk [which] has led to insurers and reinsurers paying out about $5 billion in wildfire claims over the last 10 years, which is much more than in any previous decade,” says Sieria.

“And Canada did just have a significant wildfire breakout earlier this year in British Columbia. So, this is something to continue monitoring going forward, as reinsurers, governments and primary carriers all collaborate to find proper solutions.”

And then there’s earthquake. He notes that while Canada’s west coast is most vulnerable, exposure also exists in the east. “An earthquake event could lead to significant pressure for the entire insurance industry,” he says.

 

Business case

AM Best calls for reinsurer underwriting profits to remain strong, although not to the levels seen in 2023.

“We see reinsurers now having a diminished appetite for aggregate protection, an increased focus on mean peril, and a sharp increase in attachment points,” Sieria says. “Given what we have seen with these repricing efforts in tighter terms and conditions, this has positioned reinsurers to report more stable underwriting profits going forward.”

At the same time, the ratings agency does not expect de-risking measures put in place over recent years to be loosened in the upcoming renewal.

“Reinsurers are expected to push for more rate increases and higher retentions on Canadian business…” Sieria says. “When we look at retention levels, we do not expect to see any material movements on a global basis, although there may be some minor changes in working layers. However, in Canada we may see reinsurers pushing for higher retentions for these primary carriers.”

 

Feature image by iStock/solidcolours