Casualty prices are too low, and this is not a business that should take price adequacy lightly

The first-half results season has brought much optimism from industry chief executives.

The earnings releases, which for the most part show big improvements in profits, have been littered with quotes from senior figures about rising rates and new opportunities.

Of course, a good chief executive would be expected to put a positive spin on results, however gloomy. These messages are one of the few occasions in the year when they get to communicate with shareholders, who need to be kept interested by talk of improvements and growth.

However, it is important not to get too carried away, as the industry still faces several challenges. Chief among these is casualty pricing.

The industry agrees that casualty prices are too low. And this is not a business where companies should take price adequacy lightly, especially during a global economic downturn in an increasingly litigious world.

The Libor-fixing debacle should serve as a wake-up call that financial scandals often emerge in times of economic weakness and can bring a raft of lawsuits.

So far, the industry has been spared the flurry of crisis-related liability claims expected after the collapse of Lehman Brothers in 2008. But that does not mean it should wait for a big loss to start charging risk-adequate prices.

The arrival of a large claim is not a good time to be telling your boss or shareholders that you have been writing the business below the technical rate just because the rest of the market is doing it too.

The reinsurance industry focuses heavily on natural catastrophes because of the potential for huge losses. However, property-catastrophe reinsurance is mostly adequately priced. If a hurricane hit Florida, the industry would barely flinch. Could it say the same about an equivalent casualty loss?

 

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