Conference Issue 2017

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Liability downside measuring lags property


By Kate Tilley, Editor, Resolve

Property catastrophes can damage insurers' earnings, but can casualty catastrophes kill them

That's a question for insurers from Willis Re Australia CEO Cameron Green. He told APIC17 the general insurance industry had invested significantly in developing its understanding of the capital needed to support underwriting property risk; assessing exposure to property catastrophes; and developing a range of modelling tools. 

In an interview with Resolve, Mr Green said: "The measurement of liability downside risk lags far behind property modelling. Liability is different. Risks are driven by forces that are difficult to model but no longer impossible. We are now at the turning point that faced the property catastrophe market 30 years ago."

Features of casualty cats were:

• Occurrences giving rise to multiple claims across multiple policies and multiple underwriting years
• Significant quantum
• occurrences can be man made or natural
• Impacts one insured or multiple insureds
• Single events or systemic risks.

Mr Green said casualty catastrophes included major loss events, like London's Grenfell Tower fire; medical misadventures, like "a rogue doctor or flawed process leading to mass infection of patients"; systemic product liability losses, like asbestos or faulty medical implants; and systemic implications caused by finance sector company collapses.

A single physical event, such as the Grenfell fire, could trigger many policies, including professional indemnity, D&O and workers' compensation.

Mr Green said regulators and ratings agencies were now putting pressure on insurers to better identify exposures and, in particular, aggregation risks for casualty cats.

"Unlike property risks, there is no off-the-shelf model to assist them. While first-party risks from earthquake, wind, flood and man-made perils are well served by property catastrophe reinsurance models, until recently third-party casualty risks considerably less so.

"While conventional reinsurance can respond well to threat scenarios, like industrial accidents or earthquakes, they are not designed to offer broad systemic protection."

Mr Green said Willis Re was helping clients understand the risk of ruin from casualty aggregations through a methodology called Measure, Manage and Mitigate.

"Providing guidance on risk quantification in liability classes, where data is generally poor, relative to property threats, is valuable because this deficit will become an increasing source of attention from external stakeholders demanding more coherent and credible casualty downside risk metrics than exist today," he told Resolve.

Measuring involves identifying the depth of industry classifications, professions and occupations across a portfolio. "It's the equivalent of property insurers' understanding of where they underwrite risks and vulnerabilities to cyclones, earthquakes or floods," Mr Green said.

Managing is the process of establishing a framework around the measurements and using Willis Re's proprietary tool, eNTAIL, to do scenario testing.

Mitigation is having an adequate reinsurance structure in place to help clients deal with what they have discovered in their portfolios, Mr Green said.

He told APIC17, eNTAIL:

• Quantifies downside from all casualty risk sources due to sudden and systemic events
• Provides forward-looking scenarios informed by historical events but generalised to allow for black swans
• Provides descriptive scenarios that can be used on a deterministic basis or run in a full stochastic model
• Is a transparent model – easily understood, explained and edited.

He said incorporating casualty catastrophe modelling into the risk management framework was "an important first step" and there was "no consistent approach to measuring downside risk for casualty lines".

 
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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.