Arch’s Rajeh warns casualty reserves are still insufficient

Arch Worldwide Reinsurance Group CEO Maamoun Rajeh warned that the industry is still not reserving sufficiently for casualty exposures as he addressed The Insurer’s Pre-Monte Carlo Forum in London on Wednesday.

Rajeh highlighted that adverse development has been gathering pace in US casualty lines, rising from 2.7 percentage points in 2021 to 3.9 points in 2022 and 5.7 points in 2023.

“What we are also concerned about is these recent years that are meant to be very adequately priced are starting to also very, very modestly reflect in an adverse manner,” he said.

“For me, what is different about this casualty market today and the last two very hard markets in casualty, it's my belief that the industry is not putting away a cushion in their reserving.”

With casualty currently “at best priced for prevention”, Rajeh noted that the US Federal Reserve is set to meet later this month, with financial markets pricing a 50 basis point reduction in interest rates.

“We know this is an interest rate sensitive product line for the float that it brings in, so we have to think about what that means for the future,” he concluded. “The question is whether casualty is the next shoe to drop in this dynamic market. I'd say at least the laces have come loose.”

Rajeh told The Insurer in December that Arch Re remained “fully committed” to the casualty market, having taken a measured approach to the class during the underwriting years of 2012-19. He added that rising losses and adverse development charges have prompted the market to question the baseline from which the sector’s pricing originates.

Nuanced renewals

During his presentation, Rajeh said he expects the upcoming 1.1 treaty renewals to be “the most nuanced renewal season in a very long time”.

Rajeh noted the growing conversation around specialty lines, particularly in the Bermuda market, which has seen carriers take a variety of strategic approaches.

“Bermuda used to be the place if you wanted to get property exposure, whether through traditional or non-traditional capital, that was the place,” he said.

“That, I believe, is still the case. But I also think Bermuda has been showing signs over the years of increasing its prominence in specialty lines – I wouldn’t say it's got the depth and breadth of the Lloyd’s market, but it is growing fairly materially. So this market is really well positioned again as we get into Monte Carlo to grapple with all the topics that 1.1 will put up.”

Specialty lines made up 37 percent of Arch’s $7.3bn in reinsurance net premium written for the 12 months ended 30 June 2024.

In the year to date, Arch has posted a combined ratio of 78.4 percent and underwriting income of $745mn.

“These results just don't happen without a whole lot of work. We spent a lot of time being very, very focused about the strategy we wanted to deploy,” said Rajeh.

“The key to success, as far as I'm concerned, is being true to what makes you successful, even if it's different, and then being very consistent about the execution.”

These differences in strategy will manifest at the upcoming renewals, he added, with carriers likely to react differently to current market challenges and loss activity.

“Companies will come at this very differently whether you think about, for example, the frequency of losses we've had in property, and valuation and inflation questions. You think about specialty lines as Ukraine losses start to settle out and the Baltimore bridge loss. And finally, of course, casualty and all the complexities, opportunities and challenges.”

Rajeh’s comments were echoed by fellow panellist Ian Beaton, the CEO of Lloyd’s-Bermuda (re)insurer Ark Underwriting. “People pretend the 2014 to 2019 accident years are the only years that have gone wrong. I don't see that what's happened between those accident years and subsequent years will make it a good enough market,” he said, adding that as an industry “we're still losing money in this market”.