Liability market challenges reveal opportunities to innovate

Liability insurance is in a period of significant change, particularly in the light of social inflation. Throw the potential impact of COVID-19 into the mix and it’s clear that the market faces some unprecedented challenges—but with these come exciting opportunities to innovate, according to Bob Reville, co-founder, president and chief executive officer of Praedicat.

As an emerging risk specialist, Praedicat has a particular interest in this topic. On July 9 it will present a webinar with Intelligent Insurer, “Risk Management Moving Forward: Liability Insurance after COVID-19 and Social Inflation”, addressing the opportunities in more detail.

Social inflation—whereby insurers are facing rising costs due to increased litigation, group lawsuits and larger compensatory jury awards—has shaken the US liability market in recent years. This is partly driven by the increased involvement of investment funds that are backing litigation on the plaintiffs’ side. Another key factor is a shift in the attitude of juries.

“A lot of this comes from increasing distrust by juries of big corporations,” says Reville. “A few years ago, there was arguably more belief that corporations wouldn’t be lying and manipulating science, but now I think juries might be more sympathetic to the idea that that might be going on.”

Social inflation led to adverse reserve development for a number of liability insurers in 2019 and the exit of some players from the liability space.

“The effect of all that is that casualty premiums started to increase dramatically,” says Reville.

“Some companies are seeing doubling or more of their casualty premiums. That has combined with reductions in the total amount of limit being offered and an increased number of exclusions being added—and into the middle of this environment walks COVID-19.”

Reville sees COVID-19 as emblematic of a lot of the issues currently existing in the liability space, in that it is presently unclear how much litigation may emerge out of the pandemic and how large the liability lawsuits will be.

“In terms of the size of the litigation, realistic scenarios range from $8 billion to $50 billion,” he says.

“On top of that we don’t know whether there are infectious disease exclusions, pathogen exclusions, whether the pollution exclusion will be invoked, and whether it’s going to be an ordinary disease instead of an occupational disease.

“There is a long list of coverage issues that affect the potential impact on the industry—meaning it could be the full $50 billion, or it could be zero. We don’t know whether this is a cat event or a non-event, and the buyers of insurance don’t know what they are buying.”

The result is that while liability is an important line for commercial insurance, it is not functioning well for either the buyers or the sellers of insurance. At the root of the problem, says Reville, is a lack of innovation going back several decades.

“In the 1980s and 1970s we had the tort crisis in the US, and then the crisis spread globally with asbestos litigation. Pollution and environmental litigation and asbestos all led to large-scale losses for insurers at the time.

“The industry innovated in some ways—the Bermuda market emerged for excess casualty, for example—but in other ways after the 1980s they did not innovate a lot and the market became increasingly emerging risk-averse and increasingly used exclusions.

“The limits being offered to companies did not keep pace with inflation, so the market itself was not growing nearly as quickly as property insurance—but there wasn’t another crisis. Arguably now, after 30 or 40 years of no innovation in the line, the crisis is finally coming, and it can’t stand up to it.”

At the same time, Reville sees great opportunity in this situation, due to the fact that the COVID-19 crisis is emerging at a time when there is an explosion of data availability, sparking huge potential to apply analytics to underwriting and the structuring of new insurance products.

“I’ve talked to brokers recently who have been saying that while their customers are seeing very large increases in premium, they are continuing to buy,” he says.

“At the same time the brokers feel they have to justify the value more than ever to their client—to take advantage of analytics, to structure innovative new products, to demonstrate all the things that could come from the increased amount of premium that the buyers are having to pay.

“There is a real appetite for things such as parametric triggers for liability insurance coverage. There is a huge opportunity for insurance-linked securities (ILS) to enter the liability insurance market and for more modern approaches to aggregation management and transfer of risks to reinsurance.”

Reville sees the growth of the run-off market as a fascinating development which presents a whole new way to manage the long tail of liability risk. He believes that in this environment, liability is going to be a hotbed of innovation for the next few years, having been a “sleepy backwater of innovation” for the last 30.

He sees particular opportunities for innovation in large scale emerging risks such as 5G—a risk Praedicat has been mapping in detail, examining scientific papers on the topic and assessing the potential for these to support litigation.

“We think that is fertile ground for innovation, both in the structure of the cover and in things such as ILS,” he says.

He will be addressing the opportunities in more detail in the webinar on July 9—an event that he hopes will spark enthusiasm about the future of liability insurance.

“I hope people will be excited about the opportunities,” he says.

“I feel the industry is eager to find growth; the way they have embraced cyber risk, for instance, shows their eagerness to grow.

“Liability is already a $100 billion dollar per year market and could probably be doubled in size if there was innovation in the way coverage is offered and better management of the transfer of large-scale risks to reinsurance and capital markets.

“It’s innovation that can drive the market in the next few years.”

Join Bob Reville and more than 700 senior executives already signed up to Intelligent Insurer's upcoming webinar: 'Risk Management & Liability Insurance after COVID-19 & Social Inflation', live online July 9 at 4pm BST/11am ET. You’ll find out how technology and modeling can make liability insurance more relevant to risk manager’s largest liability issues after COVID-19.

Other speakers include:
- Loren Nickel, director business risk & insurance, Google
- Nancy Bewlay, global chief underwriting officer, AXA XL
- Amanda Nguyen, senior managing director, Aon Reinsurance Solutions

Click here to register for this complimentary webinar