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Social inflation not to blame for hardening market: Arch exec

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The hardening market is being caused in large part by increased catastrophe losses and deteriorating casualty results, not social inflation, which is not a new factor, an Arch Insurance Group executive says.

It is also unclear how long the hardening market will last, said Matt Shulman, New York-based chief executive officer of Arch Insurance North America, a unit of Arch Insurance Group, who delivered the keynote address at the Professional Liability Underwriting Society’s 2020 D&O Symposium in New York Wednesday.

Mr. Shulman pointed to the keynote speech made at the symposium three years ago by John Lupica, vice chairman, Chubb Group, and president, North America major accounts and specialty insurance.

During that speech, Mr. Shulman said, Mr. Lupica blamed the prolonged soft market on factors including industry overcapitalization, poor commercial results, low investment returns, directors and officers liability litigation, and an annual decline in industry reserves.

“Every one of those things still exists three years later,” including reserve releases, which have continued, Mr. Shulman said. He said Mr. Lupica pointed out that virtually all of the industry’s underwriting profit stemmed from property, reflecting a 10-year period of benign natural catastrophe activity.

In the years since, however, the industry has been impacted by catastrophes including the Mexico earthquake; Hurricanes Florence, Michael, Maria and Florence; Japanese typhoons; and California wildfires, he said.

Mr. Shulman pointed to reports that several Lloyd’s of London syndicates were leaving the marketplace or reducing their underwriting after a Lloyd’s crackdown on underperforming business.

Property catastrophe is “certainly one piece” of the puzzle as to why the market is now hardening, Mr. Shulman said. Another is casualty results, which have deteriorated particularly in general liability, although workers comp remains “fairly profitable.”

Discussing the impact of social inflation, Mr. Shulman said an article he found in the course of his research pointed to social inflation, including nuclear jury awards, as a factor in the market – yet that article was written in 2010. 

“The reality is, it’s been here for a while,” even though in the past two or three quarters industry executives have identified it as one of the key drivers of losses, Mr. Shulman said.

He also pointed to increased securities class action cases filed against publicly held companies. “This has been building up for years,” he said.

As for how long the hard market will last, Mr. Shulman said, “The obvious answer is, I have no idea.” But signs indicate “it should last a while,” including that insurer results are driving the market, rather than it reflecting capital drying up, he said.

Furthermore, with some of the largest players reunderwriting their books, program holes will be filled by other insurers but at higher prices, he said.