Long-tail US casualty driving legacy (re)insurance market – Premia CEO

Bill O’Farrell, Co-founder and CEO of Premia Holdings, was the latest guest to appear on the Voice of Insurance podcast, speaking about innovation and applications for AI in legacy (re)insurance.

The hot topic of US casualty (re)insurance business was the focus of a Voice of Insurance podcast episode, featuring Bill O’Farrell, co-founder and CEO of Premia Holdings, a legacy (re)insurer, driven by its appetite for this long-tail business, when it goes into run-off.

Casualty reserving levels for the past decade have been increasingly under the spotlight. Many (re)insurers have sought to offload old casualty books into the legacy market – for a price – creating a stream of run-off deals for a specialist firm such as Premia.

“It’s a capital management tool,” O’Farrell said. “Just like catastrophe bonds, most major companies are looking at legacy transactions to become less capital intensive, take business they’ve already written and recycle that capital into new business. In today’s environment, that’s really attractive.”

Premia was founded in 2017 and focuses on acquiring and reinsuring run-off liabilities. O’Farrell joined “as employee number one” after spell at Arch Captial, which he joined after Chubb.

Premia has since risen to a headcount of 250 people, with offices in the US, Bermuda, UK and Continental European, and about $1bn of capital, $850m of which is its own, O’Farrell revealed, and the remainder is third party capital via its sidecar set up in 2020.

“The United States continues to be the number one market for us. Long tail casualty business in the US is a point of conversation and of interest to us, and where we do a lot of our transactions,” O’Farrell said.

“The structure of Lloyd’s with reinsurance to close makes it an important market for us, and those are the two places I think we do most of our transactions. Then in Bermuda, you often get Bermuda to Bermuda deals, but they are based on largely US exposures,” he added.

The 2014-2019 period has been a particular focus of reserving adjustments and business many firms have been keen to offload, before market hardening began to occur.

“I don’t think there’s much debate that those years have really underperformed what people thought they would be when they were originally written,” said O’Farrell, who was previously chief reinsurance officer at Chubb for more than a decade.

The long-term underperformance of casualty business has continued “masked by the pandemic” in 2020-2021, he suggested, as Coronavirus led to courts closing, causing a buildup of claims in-waiting, while the influence of social inflation has led to rising costs, albeit delayed in development, with some firms quicker to react, and adjust reserves, faster than others.

“Companies have taken different approaches. Some have reacted quickly to the data and have changed their reserves and their go forward pricing. Others haven’t adjusted so well,” he said.

A cautious approach “with wide open eyes” is needed for any legacy specialist taking on this business into run-off, O’Farrell acknowledged. In absolute terms, this meant a reduction in legacy deals in 2023, he noted.

“A fair price for the risk is what we try to do,” he added.

The conversation turned to innovation and the prospects for an important role for the sector to play in the nascent casualty insurance linked securities (ILS) market. O’Farrell emphasised the value of demonstrating to investors “a repeatable business model”, something which led to talk of casualty ILS transactions, with investors seeking confidence about duration and exit costs.

“It’s difficult to guarantee the price up front, but you can guarantee a methodology on how you reach the price up front,” he said, suggesting more clarity about terms for entry and exit for would-be ILS investors would be “transformational to the space”.

He added: “One of the things ILS investors want, just like in the property cat space, is an exit strategy. The legacy market provides those ILS investors with an exit strategy as they move into the casualty space. That ability to quote those at the end of their term is an important step in expanding ILS investors’ appetite for casualty business.”