New risks and stronger economic growth will drive liability claims costs, says latest Swiss Re sigma study

15 September 2014 Swiss Re

• Claims severity and demand for liability insurance will increase as economic growth accelerates and because of technological, social, and regulatory changes • Liability claims have been below trend in the weak economic growth environment of recent years, boosting insurers' profits • Capital strength and underwriting expertise are competitive advantages for casualty insurers

Liability claims have been lower-than-expected in recent years. This has boosted insurers' profitability despite declining liability prices, says Swiss Re's latest sigma study "Liability claims trends: emerging risks and rebounding drivers". The weak economic growth environment has been a key reason for benign claims. However, new risks and stronger economic growth will increase claims severity and generate more demand for liability insurance.

New risks emerging

A number of technological, social, and regulatory changes will drive liability claims in the near future. Cyber risk and the liability from emerging technologies, such as hydrofracking and autonomous cars, may become more prominent in claims. Tort reform has dampened claims severity in some markets, but the effects were a one-off benefit and will no longer suppress claims growth to the same degree.

Insurers are also concerned about the potential for risk accumulation, in which the insured losses from one event affect multiple companies, countries, industries or lines of business. "With global ever-increasing interconnectivity – via cyber links and supply chains – the risk of casualty catastrophes is rising," explains Jayne Plunkett, Swiss Re's Head of Casualty.

Claims growth is likely to revert to pre-crisis levels

Due to economic and social factors such as low inflation, low wage growth, tort reform, and improvements in medical care costs, liability claims have been lower-than-expected since 2008. Over the long term, claims growth typically outpaces economic growth and the expectation is for a return to this more normal growth path, which in turn will push up demand for liability insurance.

Figure 1: General liability claims incurred as a % of GDP

*Net claims incurred; Germany, France and Italy are direct claims incurred.
Source: Swiss Re Economic Research & Consulting

Redundant claims reserves from prior-year claims have been another factor supporting insurers' profitability in recent years. However, a pick-up in liability claims growth will drain reserves, and an accelerated depletion of reserves in the case of severe claims could erode the profitability of existing books of business.

Liability risks are challenging to underwrite and price due to their long-tail nature, which often results in claims being settled many years after business is written. Insurers need to take advantage of their underwriting expertise to improve pricing. Likewise, they must maintain capital strength to manage the long-tail nature of the business and the rising claims costs, such as those from the growing litigation funding industry.

Big Data and forward-looking modelling

Insurers need to innovate to capture market opportunities. With Big Data and forward-looking models, insurers can perform statistical analysis to better understand the key drivers of risks. Predictive models can anticipate future outcomes under relatively stable conditions, and forward-looking models reflect the cause-effect chain of liability losses.

"Insurers today have more data available than ever before," says Thomas Holzheu, one of the authors of the report. "They can use this to better understand complex relationships between observable risk drivers of claims frequency and severity, and to maintain underwriting quality."




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