Big Change Ahead
Insurers should view the threat of mass litigation as an opportunity to expand their business.
- Bob Reville
- September 2019
Casualty insurers must switch from an exclusion mindset to an aggregation management mindset.
While the commercial insurance industry works hard to cover and manage risks for property catastrophes such as hurricanes and earthquakes, a different type of catastrophe has re-emerged after a 20-year hiatus, and the industry is less prepared. The returning catastrophe is mass litigation, which back in the 1970s and 1980s brought the $100 billion asbestos litigation (the insurance industry's largest loss) and the $40 billion environmental litigation. Since that time, the industry has worried a lot about the “next asbestos,” but hasn't prepared nearly as well as they routinely prepare for property cats. With the news reporting multibillion dollar verdicts for RoundUp causing lymphoma and talcum powder causing ovarian cancer, and with opioids litigation that resembles the $200 billion tobacco lawsuits, it appears we may be at the beginning of a new wave of mass litigation. From this looming and inevitable crisis, I believe the market will reinvent itself in much the same way as the property market had to do in the 1990s.
The early 1990s in commercial property insurance looked a lot like casualty insurance today. After a 20-year period of very little storm or earthquake activity, the Northridge and Loma Prieta earthquakes and Hurricane Andrew caused costly losses and dislocations in the market.
In response, the market started trying to “predict” future losses using new data and computing capabilities, and a new type of analytics called catastrophe modeling to help it manage risks more effectively. These models helped companies to identify aggregated risk and buy reinsurance to spread the aggregations.
More importantly though, the dislocation ushered in a new era of creative innovation where the reinsurance, insurance and capital markets came up with new ideas for products that allowed insurers to cover and spread the largest risks, catalyzing a much more dynamic industry that was able to grow while profitably solving clients' problems.
Fast forward to today, and what we are seeing in the casualty market is a rerun of this old movie.
As a new wave of mass litigation arrives, the casualty industry's approach to managing these emerging risks is frequently to exclude them, to reduce limits and to increase retentions. The result is captured by a statistic from a 2012 Towers Watson report: Whereas in 1973, 94% of commercial tort was covered by insurance, by 2012, this had fallen to 57%, creating a $75 billion coverage gap.
To manage the newly emerging mass litigation while addressing the coverage gap, casualty insurers must switch from an exclusion mindset to an aggregation management mindset. Once again, new technologies, data sources and computing capabilities today are facilitating predicting and managing aggregations, this time for casualty. New risk models are being developed by insurtech companies, brokers and others, and a competitive market for the models is emerging. AM Best, the U.K. and Bermuda regulators and Lloyd's are also increasing their attention to latent liability accumulation.
The exciting part is that the innovators are coming forward as well. One reinsurer has developed a new casualty clash reinsurance specifically designed to help insurers manage the risk of mass litigation across multiple corporations. We are also aware of brokers and direct insurers working on similar projects. The innovators will address the $75 billion coverage gap as well as create a $15 billion annual casualty catastrophe reinsurance market.
We are convinced that the industry is on the verge of big change in casualty insurance, and this is good news for everybody.