Hiscox said it was taking pre-emptive action to head off a casualty catastrophe

Hiscox is ”preparing for a casualty catastrophe, the likes of which haven’t been seen since the turn of the century”, according to a leading insurance equity analyst.

Philip Kett at Jefferies said the insurer was at risk from social inflation - where US juries are deciding on ever increasing payouts against companies liable for casualty claims.

In its third quarter trading statement, Hiscox said the business was taking action ”in anticipation of worsening claims trends in casualty business across the market, where so-called social inflation is causing dramatic increases in jury awards and defence costs, which is impacting claims severity.”

Hiscox’s perceived exposure to casualty claims relating to the US opioid epidemic - which has seen an estimated two million Americans become addicted to powerful prescription painkillers and led to thousands of deaths - saw its share price tank by as much as 16% at one point yesterday.

Although the price did recover slightly, the potential for major damage to insurers from the opioid crisis has been laid bare.

What seems to have spooked the market was Hiscox taking pro-active measures to mitigate the casualty catastrophe threat.

These measures include strengthening its director and officer’s liability reserves, changing reserving methodology to hold casualty reserves longer, and recording new casualty claims at higher loss picks.

”These measures should leave Hiscox with higher reserve buffers in the back book, sustainable recognition of releases and more prudent front book margins,” Kett said.

Lower profitability

But the analyst also warned that the cost of prudence was lower profitability, through to 2020 and 2021.

”Management suggested that a reasonable glide path for future margins would be for the 97%-99% in 2019 to fall to 96%-98% in 2020 and 95%-97% in 2021, implying that returning to the 90%-95% target range is unlikely in the near term, as the impact of these changes earns through the book.

”In our model, this results in additional earnings cuts of >30% for 2019, >10% for 2020 and >10% for 2021.”

He added however that ”given the other issues the warning highlighted, such as catastrophe losses, fees and profit commission, this warning would seem to present all the negative news at once, reducing the likelihood of any further negative catalysts from here.”

Adequate reserving probe

Earlier this week, the Prudential Regulatory Authority sent a letter to insurers warning that a clampdown loomed if inadequate reserving was not addressed.

Acting director for insurance supervision, Gareth Truran, warned the regulator will not shy away from “considering” the use of skilled persons reviews commissioned under section 166 of the Financial Services and Markets Act, “to provide an independent view on the adequacy of individual firms’ reserving governance, controls, and reserving levels”.