No short cuts in the liability mine field

More than two thirds of respondents to the latest PPS Legal Professional Confidence Index (PCI) believe that South African consumers are becoming more litigious.

This is partly because consumers are increasingly aware of their rights and consequently exercising their rights by taking legal action when they feel aggrieved.

See you in court

The predicted increase in litigation will have a consequent impact on the liability insurance market by way of increased claims activity. In addition, competition in this sector is more intense; price pressure is growing, and the speed of change continues to accelerate. So, what does all of this this mean for those insurers who underwrite significant books of liability business?

Liability risks have notoriously been challenging to underwriting and price due to the long-tail nature of risks that habitually result in claims being settled many years after business is written. Apart from the time it takes to settle claims, underwriters also need to be aware of the fact that all too often there is also an accumulation of risk when there are multiple liability claims originating from the same cause.

No more barriers

The need for underwriting expertise was a historic barrier of entry, and protected liability products from being commoditised, which is no longer the case. Even though the long-tail nature of liability products means that insurers must maintain their capital strength to stay competitive, new entrants in this sector continue to proliferate. This in turn prolongs the downward pressure on rates.

The attraction for many carriers to the sector is that liability claim trends have been lower than expected in recent years, sustaining profitability. In addition, surplus claims reserves for past claims have supported underwriting results. The profitability improvement has come despite declining premiums but this could all change in the near future.

Increasing severity

Since South Africans seem to becoming more litigious, liability claims are expected to increase in severity as well as frequency which will push up demand for insurance.

An increase in claims activity will however increase the distribution of claims reserves, accelerating their depletion at a time when carriers are required to comply with more stringent capital adequacy ratios.

Adverse developments and higher demand for cover should support increases in liability premiums. But if competitive market conditions prevent prices from keeping up with the claims trends, the profitability of existing books of business will be eroded.

In addition, a number of technological, social and regulatory changes will influence the short to medium term future of liability insurance. Cyber risks and the liability from emerging technologies, such as hydro-fracking, nanotechnology and autonomous cars will undoubtedly have an impact on liability claims.

Enter litigation funding

Meanwhile, other countries are experiencing an expansion of litigation activity through the advent of litigation funding, and it seems as if South Africa will see the introduction of litigation funding in the near future.

Many of these factors will increase liability claims and boost demand for insurance. To capture opportunities in the liability market in the face of competitive pressures, insurers need enhanced capability with forward-looking modelling and the use of Big Data will be necessary to maintain underwriting quality.

To remain resilient, liability insurers will have to focus on securing and developing the scarce skills found in this arena while containing costs through innovation and by embracing technology as never before.

The most important ingredient to success in the liability sector will probably be the ability for insurers to balance the competing elements while always maintaining a longer-term approach to decision making. Participants in the liability sector will come and go over the next few years, but the successful ones will be those who understand that there is no short cut in the long term; particularly when it comes to liability insurance.