European and APAC casualty trends; a dynamic market

Authored by AXA XL

Macreconomic turmoil, social inflation, an increase in so-called ‘nuclear’ court verdicts and a focus on Environmental, Social and Governance (ESG) concerns, mean that the European casualty insurance marketplace is dynamic and evolving. Marine Ress, chief underwriting officer, casualty APAC & Europe, and Julien Martins, product leader, casualty, APAC & Europe, discuss the latest trends. 

A challenging economic, geopolitical, and social environment means that our clients in Europe, Asia & Australia are facing an evolving set of casualty exposures. Inflation, rising jury awards and an increasing propensity for people to claim, coupled with newer areas where claimants are seeking redress – like climate change litigation, mean that clients’ risk profiles are changing, and our risk transfer response is shifting too. 

Economic inflation has, and will continue to have, a significant impact on casualty claims. In August, inflation in the Eurozone measured 5.2%, according to Eurostat, the statistical office of the EU. While this is down from the 8.5% inflation rate recorded across Europe in February, and lower than the 9.20% average for 2022, inflation is being particularly felt in the costs of materials for repair and replacement, which fuels an increase in the size of casualty claims. Inflation in service industries slightly increased to 5.5% in August compared with 4.8% in February.

We have also noticed an impact on the size of bodily injury claims, with medical costs rising sharply as a result of economic inflation. In France for example, based on internal analysis performed in the past few months, we have seen bodily injury claims costs trend increase by about 40% over the last 16 years.

With high levels of inflation expected to endure for some time to come, insurers, reinsurers and their clients will be keeping a close eye on how these trends develop and examining ways to adjust limits and towers of coverage to ensure risks are transferred in an affordable, responsive way.

Social inflation and nuclear verdicts

Against the backdrop of economic inflation, the continued impact of social inflation – notably in the United States – is affecting more and more clients in Europe. 

Social inflation – when insurers’ claims costs exceed general economic inflation – is driven in part by plaintiffs being incentivised to bring lawsuits. The US is far from the only country where social inflation is prevalent – Australia and the UK are two other notable examples of jurisdictions where this trend is taking hold. But the problem is exacerbated in the US by the swelling costs of jury awards. 

In 2020, tort costs in the United States totalled about $443 billion – roughly equivalent to 2.1% of the US’ gross domestic product. Of that total, just over half – 52% - was for general and commercial liability claims including personal injury and consumer claims, 44% for automobile accident claims, and the remainder related to medical claims. 

So-called ‘nuclear verdicts’ – jury awards of $10 million or more – are a particular issue in certain states, including California, Florida, New Jersey and New York. The size of these verdicts is often driven by the award of non-economic, or punitive, damages and nuclear verdicts are most common in cases involving product liability, auto accidents and medical liability.

According to the US Institute for Legal Reform, the median cost of a nuclear verdict was $24.6 million in 2019, compared with $19.3 million in 2010 – a 27.5% increase. 

This trend is of particular concern to our clients with US exposure and notably in those states where nuclear verdicts are more commonplace. We communicate regularly with our US colleagues about developments in this area to be able to better understand the risks to our clients and the appropriateness of primary layers, including attachments points of cover, wording amendment, and pricing adequacy.

In other territories, like Australia, we are mindful of the increase in litigation funding. There have been a number of collective actions in Australia against utility companies, for example, for claims connected to recent wildfires. 

Across Europe too the volume of collective actions is growing and looks likely to continue to become more significant. While the absence of punitive damages in such cases means there is unlikely to be an explosion in mega-awards, the increasing frequency of these actions for collective redress is a trend that we are monitoring closely.

Focus on ESG performance

An increasing area of focus for stakeholders, shareholders, activist groups and plaintiff lawyers in recent months has been the ESG performance of companies. We, like our clients, are monitoring this and working to understand the shifting mindset of activists, shareholders, non-governmental organisations (NGOs) and other groups. 

ESG presentations are now increasingly a part of the risk submissions our clients make, and we seek ever greater information from them about their goals, actions and progress. The carbon emission performance of companies is a notable area where litigation, in particular in the area of greenwashing, is beginning to pick up as claimants look to hold companies accountable for their climate commitments, including decarbonisation commitments, but we are also seeing an increasing number of notifications for more general environmental impairment liability claims. 

Insurer response

As underwriters, we work closely with our clients to understand their exposures and the changing dynamics of the risks that they face.

Over the past 18 months or so, we have been paying a great deal of attention to the risk profile of our clients that derive a high proportion of their turnover in the US. We’ve adapted our limits for them, introducing new sub-limits where appropriate, and reviewed the wording of their coverage as well as their premiums.

To better understand these risks, we work closely with claims teams, risk engineering teams and our US colleagues, notably in the areas of employers’ liability and auto liability, where they have knowledge and expertise. We pay great attention to factors like the number and size of auto fleets (the limits of their Auto Liability programs) clients operate in the US, for example.

Our goal is, of course, to support our clients through these somewhat testing times. 

Good communication is vital here. The most granular information our clients can provide to us, the better our understanding of their risks and potential exposures and the most adapted the solutions we can offer. We hope that we can continue the dynamic discussions we have been having with our European and APAC-based casualty clients as we all address the changing risk landscape.