For casualty rates to rise, you don’t need a catastrophe

W.R. Berkley sees the future of rate changes about how I do:

Berkley says he believes the market has already begun to turn. He says there is a misunderstanding among some that the market simply turns overnight. The reality, he says, is that in casualty lines, there is generally a level of unrest that builds, and then urgency increases over time.

In the previous soft-market cycle, Berkley says, the 9/11 attacks didn’t turn the market. He says the market had already been turning, and that event accelerated the turn in a dramatic way. Severe catastrophe activity later this year could have the same effect, he says.

Berkley sees rate increases already, and I haven’t. But his memory tracks mine.

Increases started in late 1999 or 2000 in professional liability lines, and it was driven by the realization that, yeah, the actuaries were right – prices were way, way too low. (The dotcom bust had an effect, as unrealized losses cost the industry billions.)

WTC was a shock, and I think the early estimates of losses from the attacks ($70 billion was the high; the true cost was about a third of that) certainly accelerated what was already happening.

Now, I’m not enough of an old-timer to remember what created the mid-80s hard market, but this old David Cummings paper gives a few clues:

We find that the atypical premium increases of 1984–1986 can be explained largely by the increase in expected losses during the period, the restoration of markups to more normal levels following the shock, and changes in interest rates.

The feds approached it differently in this paper, saying rates fell because interest rates rose, and insurers depended on the float to cover themselves. When interest rates fell, rates had to rise.

They also noted that tort theory shifted 1970s and 1980s, as joint-and-several liability and other tactics made insurance a way to make an injured party whole, even if the blame didn’t rest on the party the insurance company covered.

The important point: The ’80s hard market wasn’t driven by a catastrophe.

And a large cat doesn’t guarantee a hard market. Otherwise, casualty rates would have risen after Hurricane Andrew in 1992 and Hurricane Katrina in 2005.

A large cat is neither necessary nor sufficient to drive casualty prices. To believe so is to fight the last war.

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