Charles Dickens’ novel “A Tale of Two Cities” opens with “It was the best of times, it was the worst of times”. So, is it the best of times to be a liability underwriter? At first glance, it may not appear so.
While reserves from prior underwriting years are being released to help maintain profitability levels, at the same time there are strengthening of reserves in certain liability sectors, particularly for historical asbestos and environmental liabilities in North America which would normally result in pricing increases. However, due to excess capacity for most risks, a rise in prices will make business retention and new business growth difficult; so perhaps it is the worst of times to be a liability underwriter?
Adding to the difficulty for accurate pricing of liability risks is the recent changes in the UK discount factors — commonly referred to as the Ogden Tables. This means that many insurers (and reinsurers) with long-tail exposures in the UK and other common law countries are reviewing the adequacy of their current reserves for known claims, and also re-considering how they calculate their IBNR and IBNER factors.
There has been discussion about the suitability of the current discount factors for some time, so while this shift was not totally unexpected, the move to a negative discount rate, in effect a rate increase was not expected by many. At the time of writing this article there have been a number of announcements from insurers about increasing their reserves to allow for this which resulted in sizeable deteriorations in their financial underwriting results for 2016.
Pricing for long tail business has sometimes been likened to driving a car forward whilst looking through the rear-view mirror at where we have been because of reliance on historical data to assess how a portfolio is likely to develop. It has always been a challenge for actuaries and underwriters, and shows no sign of becoming any easier.
This is because as well as looking at historical data and trends, new exposures which are developing through the impact of socio-economic, legal and regulatory and technological risk drivers, across both general liability and financial lines, present challenges for successful underwriting.
For this, the underwriter needs to also look forward, possibly many years in the future, to assess what the potential impact may be. This presents an underwriter with a great opportunity to engage with customers in discussion about risk, and to develop solutions to help transfer these risks. Some of the areas where we see increased liability exposures for businesses include:
Cyber security: risks associated with data protection and security hit the headlines again recently with two ransomware attacks affecting many businesses around the world. The new European Data Protection Regulations (EDPR) become effective next year and create new risks for compliance and notification not just for companies based in the EU, but also for any companies handling personal data for European citizens. This will create new areas of risk for call centres etc in Asia who may provide services for European customers. Cyber risks are now a critical part of a company’s risk exposure and need to be addressed at Board level, including, but not solely, the purchase of suitable insurance coverage to transfer some of the risk.
Driverless cars: whilst not a common feature today, there is a growing use of these in limited controlled environments, and in the not too distant future we can expect to see more of these on public roads. The generally accepted view is that the use of computers to control safety functions will result in few collisions or accidents, leading to lower claims costs, and lower motor insurance premiums. The concern for liability underwriters is what happens if a critical device fails, or is alleged to have failed, does this become a product liability exposure for the manufacturer of the device, in effect passing the claims cost on to the liability insurance market? Will the failure of a single defective device lead to a mass recall of other affected vehicles?
Drones: drones are becoming an accepted part of many business operations, particularly for inspection services in dangerous or inaccessible locations. Various media reports have alleged near-misses with commercial aircraft, and whilst the predicted delivery of pizza by drones has yet to become a regular sight, there has already been litigation for injuries caused by pizza delivery drones, in the US1. Legislation of drones varies globally as to whether it is classed as an aircraft, so whether the operator needs to purchase specific aviation cover, or whether it can be included as an extension under a Public or General Liability policy will depend on how this regulation develops.
Management liability: securities litigation is the US shows no sign of reducing, in fact the Cornerstone Report on Securities Litigation for 2016 shows that this is actually increasing, with 271 Class Actions Lawsuits filed in the US in 2016, compared to 189 in 2015 — an increase of over 40% and the highest level since 2001. Litigation involving non-US firms is also high with 17% of the lawsuits filed involving foreign companies, when only 16% of the listed companies in the US are foreign-based; whilst large corporates will always be a target for Securities Litigation, data shows that new plaintiffs’ lawyers have started to identify smaller capitalised companies.
Securities litigation is no longer solely confined to the US; there have been recent high-profile cases involving companies in Europe and Latin America and in the Asian region where failure to have a robust corporate governance program, particularly in relation to bribery and corruption have resulted in extensive legal and regulatory investigations, prosecutions and penalties.
These emerging risks create both challenges and opportunities for underwriters; the lack of any credible historical data makes claims frequency and severity loss experience difficult to predict, so pricing of risks becomes challenging. Too optimistic assessments could prove to have a severe financial impact whereas a too conservative view may mean that premiums become too expensive to be commercially affordable, leading to un(der) insurance, or creating opportunities for other risk transfer solutions to step in.
With the development of new liability exposures, current policy wordings may not cater for some of these emerging risks, so it is critical to make sure that any amendments which may need to be made are carefully drafted to ensure that the terms used reflect the intention of all parties involved in the contract. This may also lead to new and innovative policies being developed, as has happened with the range of cyber policy wordings available in the market.
The best of times? Perhaps, because the scope and pace of change in the liability environment, and the variety of risks written by casualty underwriters does mean that the opportunity to respond and develop new risk transfer solutions for a client can be greatly satisfying for an insurance professional.
In conclusion, is it the best or the worst of times for liability underwriters? In reality, it is probably neither, although in the words of another great writer, the musician (and Nobel prize winner) Bob Dylan, ‘the times they are ‘a-changin’ and these changes create opportunity so it is up to the insurance professional to embrace change, develop new products and services which are relevant to customers’ needs in the modern, technology driven world.
