Navigating casualty challenges and opportunities

US casualty has arguably been the hottest topic in the sector over the last year amid growing concerns over deteriorating loss trends. E&S Insurer talks to Kyle Sternadori, head of wholesale excess casualty at Navigators, a brand of The Hartford…

How are you approaching current E&S excess casualty market dynamics?

We are focusing on loss trends, such as rising loss costs, and staying ahead of those trends. As an excess market there are ways to do that: managing capacity and limits deployment across the portfolio; working internally amongst claims, actuarial, data science to stay ahead of that; and using your own data. Staying ahead of the curve is essentially what we're trying to do.

It started for us probably even before the market hardened. You saw towers of coverage that used to be maybe three markets and nowadays it could be 10 to 15 markets for similar coverage, with each market minimising its downside.

That's really the biggest impact an excess market can have. With rising loss costs and with what we're seeing with social inflation and economic inflation, it's probably going to be that way going forward, in the near term for sure. Frequency is fairly stable, but severity has been a bit more challenging in some areas and that's what makes it difficult for the excess market.

Can you really underwrite for nuclear verdicts?

With long-tail lines it's inevitably difficult to price for future trends and have a crystal ball per se. For excess, how do you manage that? I think it goes back to that limits management approach. That's the biggest area you can have an impact. As the claim severity rises, economic inflation has had an impact on cost of goods and materials and what have you, but then you're seeing social inflation on the part of general damages going up across the board. Limits management and attachment point is an area you always need to look at from an excess standpoint, but as we get into these rising litigation costs it's difficult to manage.

Legal system abuse reform is a huge area that I think will have an impact on some of these excessive costs and lawsuits that they're generating. Working with our claims staff and actuarial friends about using their expertise and what they're seeing in terms of what's developing helps you as an underwriter to learn to adapt.

Third-party litigation funding is having a huge impact overall. It's a multi-billion-dollar industry in itself and certainly is driving loss costs across the board. Staying ahead of things and being on top of your own data, seeing the trends before they happen... no one can predict nuclear verdicts, but you can certainly see the trends and try to stay ahead of them as much as you can.

What impact are reinsurance market conditions having on the excess casualty market?

Reinsurers have taken a harder stance on casualty in the past couple years and in turn that puts more pressure on the primary markets. Excess of loss placements are getting tougher, quota shares continue to have pressure on ceding commission, loss ratio caps are in play on some books that lack historical experience or have had adverse loss experience. On the auto side there's pressure for better attachments. Those terms that the reinsurance market is putting out on these treaties can curb the behaviour of the casualty market overall. That probably started one or two years ago and it's not getting any easier as we go along.

How would you describe momentum in the E&S casualty market?

I think the E&S sector, especially in casualty, remains particularly strong. We're seeing an increased flow of accounts come into this space, so we feel that it's healthy, and it's certainly sticky from the demand standpoint. Maybe some of the growth has slowed down, but there's still substantial growth there, so we see it as a healthy place. As the casualty space becomes even more challenging, I think you'll probably see even more need for E&S and the role we play in risks overall.

We've added a significant amount of talent over the past three or four years, and where we sit in the market, we certainly have a lot of leverage in terms of what we can do and our capabilities.

The E&S market is meant to alleviate some of these areas where there's not capacity. For us in most cases we're naming our terms and conditions and we're signing on the risks on our own terms and at what we're comfortable with.

Even with the challenges, we feel we're in a healthy spot, and we're encouraged about the future for sure.