Selective Insurance Group, known for its consistently strong returns and conservative approach, just threw a curveball at the market. Their latest earnings call, covering the first quarter of 2024, reveals a stark reality: social inflation is not just nibbling at the edges of the industry, it's taking a big bite. And Selective's actions may be a harbinger of things to come for other insurers.

The headline number? A $35 million net unfavorable prior-year casualty reserve development, primarily driven by a $50 million hit in standard commercial lines' general liability. While Selective has historically boasted a remarkable 18 consecutive years of net favorable prior-year casualty reserve development, this unexpected charge raises eyebrows, especially given their reputation for disciplined underwriting and reserving practices.

What makes Selective's situation particularly intriguing is the company's unwavering stability. Their portfolio mix, in terms of hazard, limits, and industry segments, has remained remarkably consistent. Even their geographic expansion, while adding some exposure, actually diversifies their portfolio in the context of traditionally litigious states. This consistency eliminates many potential internal culprits for the reserve charge, leaving a more ominous external factor: social inflation.

John Marchioni, CEO of Selective, minced no words on the earnings call, calling out 'elevated social inflation' as the primary driver. This phenomenon, characterized by a surge in attorney representation, longer settlement times, and inflated settlement values, seems to be hitting all open accident years, regardless of the underlying business characteristics. Certain states, with their plaintiff-friendly legal environments and expanded liability theories, are feeling the heat even more intensely.

Casualty Loss Trend Assumptions (Excluding Workers' Compensation)

Selective has been steadily increasing its casualty loss trend assumptions over the past few years, indicating growing concerns about social inflation's impact.

General Liability & Umbrella Renewal Pure Price Increase

Selective's proactive approach to combating social inflation is evident in their accelerating pricing strategy.

What does this mean for the industry? Selective's deep dive into reserves and proactive pricing strategy suggest that social inflation is no longer a whispered concern, it's a quantifiable threat. If other insurers are experiencing similar severity emergence, we could see a domino effect of reserve charges and price hikes across the industry.

Combined Ratio Impact

Selective's updated guidance for 2024, reflecting the full-year impact of the reserve development, increased the combined ratio to 96.5%, up 1 point from their initial forecast. This upward revision, despite stable underlying trends in other lines, speaks volumes about the magnitude of the social inflation impact.

If we see similar combined ratio revisions across the industry, particularly in general liability, it would lend credence to the hypothesis that Selective's situation is not unique. This could trigger a fundamental shift in investor sentiment, forcing the market to re-evaluate its expectations of declining pricing in 2024.

Selective, often seen as a leader in the industry, may be sounding the alarm bell on social inflation. Their proactive response, driven by hard data and a commitment to underwriting discipline, could force others to confront this reality and adjust their own strategies. The coming quarters will reveal whether Selective is the canary in the coal mine or simply an outlier in an otherwise stable market.

"Fun Fact: The term 'canary in the coal mine' originates from the practice of using canaries to detect toxic gases in coal mines. Canaries are highly sensitive to these gases and would collapse before miners, providing a crucial early warning system. In this context, Selective's reserve charge could be an early indicator of a broader industry issue."