Turning Point for US Casualty Reserves: Lockton Re Predicts Stability Ahead

According to Lockton Re's report, titled An Inflection Point in the US Casualty Reserving Cycle, the US casualty reinsurance industry is at a pivotal moment, with adverse reserve development from prior accident years expected to decline significantly by 2025. Following reserve strengthening for the "soft market block" of accident years 2014–2019, recent data points to a more favorable reserve outlook.

Analyzing Schedule P data for Other Liability Occurrence (OLOCC) and Other Liability Claims Made (OLCM) reserves, Lockton Re estimates ultimate losses of $134.9 billion for OLOCC and $70.5 billion for OLCM for accident years 2014–2019. The industry has booked these amounts at slightly higher figures of $135.4 billion and $72.3 billion, respectively, suggesting a minimal reserve redundancy. Per Lockton Re, this alignment implies that the industry may soon be free from this period's additional reserving requirements, potentially capping ultimate losses near $135 billion for OLOCC and $71 billion for OLCM.

According to Lockton Re, the recent accident years of 2020–2023, categorized as the "hard market block," present different challenges. Social inflation remains a prominent factor, yet the market has countered it with increased premiums, improved policy terms, and higher inflation-adjusted exposure bases, particularly impacting 2022–2023. Reserves appear conservative for these years, with the potential for favorable development, especially within OLCM lines. Lockton Re notes that the current reserve adequacy may result in a lower tail-year development compared to recent trends.

Lockton Re's report also examines the industry's current incurred but not reported (IBNR) distribution, showing that reserves for accident years 2020–2023 now account for 82 percent of OLOCC and 88 percent of OLCM IBNR reserves. Given this distribution, Lockton Re states that the direction of future reserve adjustments will hinge mainly on these recent accident years, while the influence of the 2014–2019 period will likely diminish. This shift marks an improvement for casualty lines post-2020, with the industry implementing market corrections and taking a more conservative approach in the last 12–18 months, potentially leading to reserve releases as early as calendar year 2025.

The impact of this reserving cycle shift will vary across casualty sectors. Lockton Re predicts that the excess casualty market may see price stabilization after 5 years of rate hikes, though social inflation could sustain moderate increases. Public directors and officers (D&O) insurance, meanwhile, is expected to soften as accident years 2020–2024 develop favorably. In the reinsurance space, downward pressure on US casualty treaty ceding commissions is expected to ease, and Lockton Re anticipates upward adjustments in commissions as the sector solidifies its reserve adequacy over the next 12–18 months.

The full PDF version of Lockton Re's report, An Inflection Point in the US Casualty Reserving Cycle, is available here for download.