(Re)insurers are experienced at managing aggregate property risk exposure, but are still lacking data and adequate modelling to thoroughly understand potential casualty clashes, according to an industry roundtable hosted by Insurance Insider in partnership with Verisk.
For example, the 2017 high-rise fire in the 24-storey Grenfell Tower in north Kensington, West London – which killed 72 people – resulted in liability claims in addition to property losses. Professional liability for architects and engineers was among the casualty lines with claims, said Sima Ruparelia, PartnerRe’s chief actuarial and risk officer.
Interconnected supply chains are something people really don’t understand
“You wouldn’t necessarily think a fire loss would lead to E&O claims,” Ruparelia said.
A single localised event, such as the devastating 2011 Thai floods, can spark claims globally. The growing interconnectedness of the world – and the increasing risk of multiple insurance lines being triggered at once – has been repeatedly highlighted in recent years through events such as Covid-19 and the recent Ukraine-Russia war. All resulted in supply chain issues, the panel noted.
“Interconnected supply chains are something people really don’t understand,” said Rodney Bonnard, EY’s insurance and markets leader within UK financial services. “Most people don’t have the data to really understand how entangled stuff is.”
The 9/11 terrorist attack is another event that impacted multiple lines, said Tony Rai, Aspen’s group chief claims officer. “I think then we had a real lack of understanding of how that would impact the market. I think we are better prepared to deal with the impact of concentration of risk today.”
One in four of Lloyd’s claims since 2000 have impacted multiple lines, said Kirsten Mitchell-Wallace, director of portfolio risk management at Lloyd’s. “The bigger connections that you’re seeing are going to exacerbate those kinds of clashes,” she said. However, she noted that losses from casualty catastrophes have so far not reached the magnitude of a US hurricane.
David Flandro, Howden’s head of analysis and strategic advisory, said longtail lines face more pressure from the asset side of the balance sheet that short-tail property lines.
We don’t talk enough about how the balance sheet side of our sector contracted massively last year
“We’ve just seen the most rapid interest rate rise in about 40 years, and the fastest rise in inflation,” Flandro said. “We don’t talk enough about how the balance sheet side of our sector contracted massively last year, and that happened with that interest rate rise that was a result of inflation… those big macroeconomic events in our case have created a coalesce of events across all longtail lines.”
“When you’re writing long-tail, you just can’t emphasise the underwriting itself – of course it’s core to everything. But you’ve got to look at the economic side of the business as well,” he said.
Those macroeconomic dynamics and geopolitical impacts contribute to making modelling casualty loss scenarios more challenging, the panel said. Insurers can fall into a “silo” approach to viewing risk, said AM Best’s head of analytics Mahesh Mistry.
“We’re very good at looking at a [single] risk. But when it crosses into another risk, it gets harder and a little bit more challenging, particularly when you get to crossing insurance risks with economic risks,” he said.
Understanding exposure to systemic risk in the nat cat space has been “industry-established for 30 years”, but collating appropriate data was more challenging in liability lines, said Eric Gesick, liability analytics leader for Verisk.
“With liability you have got the multiple lines, but also understanding the core objective of the data elements needed to actually model, that is not captured consistently,” he said.
“That’s one of the things that the industry really needs to work on to get a fundamental understanding of how you are going to have this interconnected exposure between multiple lines, jurisdictions, industry groups, everything.”
Lloyd’s Mitchell-Wallace said modelling of casualty aggregations is “less mature” than in property, but is improving.
“A lot of work is being done but there is still a lot more to be done,” she said. “It starts with the exposures, then the aggregation is on a scenario basis.”
A key challenge around casualty modelling is the extent of uncertainty around the ultimate cause of loss.
Casualty modelling is “an order of magnitude more difficult”, Bonnard said.
“With casualty it is like an unknown unknown,” he said. “You don’t know what the events are, unless you say it is cascading liability from a physical damage.”
PartnerRe’s Ruparelia said casualty modelling depended on varied scenario planning.
The tentacles of climate risk are very far-reaching
“A huge amount of it is coming up with different scenarios,” she said.
“Yes, you can’t predict all of them, but you can come up with a number of them, depending on the interconnections.”
Climate risk was one area the panel said had potential to disrupt the industry.
“People are starting to have to disclose what they’re doing,” Ruparelia said. “Somewhere along the line, it’s going to be well, either they weren’t doing enough, or they haven’t thought about something, or they disclosed something incorrectly.”
Everyone talks about the frequency and severity of weather events, but “the tentacles of climate risk are very far-reaching”, Mistry said. He added that the threat to biodiversity and the repercussions to the loss of plant and sea life could impact the healthcare sector, which uses resources like these to create drugs. “From a liability perspective, there could be potential consequences.”
Social inflation
Meanwhile, participants noted that social inflation remained a key theme impacting casualty underwriters.
Gesick explained that geopolitical, legal, fiscal and financial instability all impacted social inflation trends, and that the Covid-19 pandemic had “supercharged” these factors.
Rai said rising jury verdicts were driving insurers to settle claims earlier for larger amounts, rather than risking nuclear verdicts from juries.
“There is a fear within the industry, and that has driven up the settlement value of the claim, so they are not allowed even to get near a jury,” he said.
Another factor that was highlighted as an influence on rising claims costs is litigation financing.
“It certainly impacts severity,” said Rai.
However, Flandro said that when market participants spoke about social inflation “they mean all kinds of different things”.
“It still seems fairly nebulous to me in terms of pinning down a definition.
“I think the best definition I have seen is just how much is the rate of inflation exceeding the change in the claims ratio.”
Loss activity
David Rees, head of casualty for SiriusPoint London, noted there was still uncertainty around loss years during Covid-19, when there was a drop in claims frequency.
“During those 2020-2022 years, is this a new norm or are we just benefiting from a two-year holiday?” he said.
AM Best’s Mistry said exposure management was “better than it used to be”, but that issues continued to come up relating to back-year underwriting.
“You can’t change what has been written in the past and that is where the issues are,” he said.
That back-year deterioration was contributing to an uptick in activity in the legacy market, Aspen’s Rai said.
“Why are we having more LPT-type arrangements taking place now?” he said.
“Partly it is that back-year deterioration relating to a lot of casualty insurance that sits out there that there might not be appropriate reserves for.”
The road ahead
Underwriting doesn’t happen in a vacuum, Flandro said, noting (re)insurers face increased pressure to meet higher returns on invested capital.
Building a view of risk benchmarking, the breadth of scenarios and events in the catalog, to stretch the imagination of how it can impact insurers I think is really important
“This world is really different to the world that we had, as recently I would say, December 2021,” Flandro said. “I don't know if we've all realised it yet. I think we all have here around this table. But I don't know if the industry has realised what a sea change that it is to underwrite in this environment that really is more similar to 20 or 30 years ago, than the environment of two years ago or three years ago.”
Gesick said an industry framework similar to net cat model would be beneficial to the liability side of the business. “Building a view of risk benchmarking, the breadth of scenarios and events in the catalog, to stretch the imagination of how it can impact insurers I think is really important. I think there'll be a lot of benefit in building that framework from an analytic intelligence and insight standpoint, not only for insurance, but also for consumers and customers of insurance,” he said.
“We're doing a lot better than understanding these exposures. But we still got a way to go,” Mitchell-Wallace said.
