Beware the long tail of casualty insurance

The growing interest in South Africa’s property and casualty insurance sector was confirmed when more than 1400 information-hungry insurance professionals flooded SHA’s virtual lobby for the release of the insurer’s much-anticipated 2022 Specialist Risk Review. According to Simon Colman, Business Head: Digital and Financial Lines at SHA, many attendees had joined proceedings to get the low-down on how much the specialist insurer had paid out or reserved to indemnify its policyholders in 2020 and 2021 years.

Multi-year duration of risk exposures

“Brokers are always interested in how much we have been paying or reserving for claims; it certainly seems to be a barometer of how things are going in the local casualty market,” he said, before asking SHA CEO, Gareth Beaver, to comment on the challenges facing a business that writes a unique combination of long tail casualty covers an short tail non-casualty covers. For the uninformed, the phrase ‘long tail’ is used to describe the multi-year duration of risk exposures underwritten in the casualty market. As the report states: “It can take from three to eight years, or even longer, from the notification of a claim until its final settlement, or for an initial intimated claim value to be fully accounted for as a claim incurred”. 

The discussion kicked-off against the backdrop of SHA’s claims experience per underwriting year, going back a decade, to include the record claims incurred for 2020, exceeding ZAR1 billion. “The payment of these claims is the fulfilment of the implied promise of our insurance policies for the benefit of our insured clients; this is our purpose in action,” said Beaver, before reminding the brokers in attendance that SHA’s mission could be distilled into four words: enabling progress, securing tomorrow. “The bulk of that R1 billion relates to two very large claims that were notified to us seven years prior, in 2013; we built up the financial reserves and necessary provisions for those claims over that time,” said Beaver. 

No market without reinsurance support

It is impossible for primary casualty insurers to take such massive risk exposures on own balance sheet. “We package our clients’ risk and put it into the global reinsurance pool, so our partnership and relationship with global reinsurers is extremely important; we have to feed them enough premium to satisfy them that when the big claims come they step up and refund us our reinsurance claims,” said Beaver. Casualty reinsurers have wasted no time in pushing reinsurance rates higher in response to record claims, despite having benefited from 15-years of relatively benign claims until 2019. 

Hard markets and the need for insureds to take a greater interest in risk management dominate the introduction to the SHA 2022 Specialist Risk Review. “The hard market we commented on in our 2020 review persisted through 2021 and continues unchecked into 2022, thus perpetuating the challenges previously noted when placing new business and negotiating renewals in the casualty lines,” wrote Beaver. And it was not surprising that the virtual event spent so many minutes on pricing issues given the report conclusion that “failing to price correctly for future uncertain exposures is the biggest risk facing liability underwriters” going into 2022. 

The long tail nature of casualty exposures makes pricing difficult, for both insurer and reinsurer. “Given the importance of pricing long tail risks correctly, and given what you know about our 2020 claims incurred, do you think that SHA got the pricing right back in 2013,” asked Colman, putting his CEO on the spot. “The development timeframe for a typical liability claim is anywhere between three and eight years,” responded Beaver. “It is near impossible for anyone to profess that they can actuarially or scientifically work out what the right liability cover pricing is today”. Instead, pricing of casualty business relies on an interplay between the insured, who pays the premium; the primary insurer, who underwrites the risk; and the reinsurer. 

Squirreling away for the next disaster

In the above context insureds should view their annual casualty premium as a type of deposit that builds up over a number of years and is released when a low frequency, high severity liability loss is incurred. This long tail preparation for risk explains why relationships are so important in the casualty class. “We stress the importance of long term relationships in the casualty market,” said Beaver. “It is a lot easier for insureds to move their motor or short term asset portfolio to another insurer; but the general advice for casualty cover is to stick with quality markets”. Brokers and their clients should pay close attention to insurer and reinsurer sustainability before placing these risks, given that all stakeholders need to be around eight, nine or 10 years into the future. 

One cannot cover a Specialist Risk Review launch without some comment on the statistics it contains. Our favourite during the 30-minute-long opening presentation dealt with insureds’ perceptions of the country’s short-term insurers. Despite claims hiccups during the 2020-21 pandemic and despite various industry shortcomings revealed during the July 2021 riots, 92% of the business owners surveyed by SHA said they trusted their insurers to pay out following an insured loss. “Business respondents have reflected on their experiences over a long period of time and concluded that they still have trust in insurers and the promises made in terms of their policies,” said Beaver. 

Colman spent a few moments reflecting on the likely impact of large scale non-casualty losses, such as the July 2021 riots and April 2022 KZN floods, on insurers’ liability claims experiences. According to Beaver, the first line of losses occur at the asset level through damage and destruction to buildings, houses and motor vehicles as well as loss of profit due to business interruption (BI). “There is, however, no doubt that these events will potentially give rise to some latent casualty claims,” he said, adding that there had been a notable spike in broker PI claims following the 2020-21 COVID-19 BI claims experience. It normally takes up to two years following a catastrophe for these latent liability claims to emerge. 

We are all in this together

The importance of relationships in the casualty market was affirmed in Beaver’s closing remarks. Commenting on a cartoon of four individuals occupying a sinking rowboat, he said that the insured; insurance broker, risk adviser; and re/insurer may look as if they sit on opposite sides of the equation, in different boats as it were, yet they are all in the risk environment together. “The underlying driver of our annual Risk Review is to listen to our insured clients and brokers … we take your feedback into account in what we do; in the direction we are going in; and in shaping our products, services and strategy,” he concluded. “This represents a deep engagement session with clients who are buyers of insurance and with brokers who intermediate between those buyers of insurance and the market”. 

Writer’s thoughts:
The long tail nature of casualty exposures is clearly illustrated in the SHA 2022 Specialist Risk Review, which we encourage readers to download from the SHA website. In the meantime, we would love to know whether you are concerned about broker professional indemnity and other long tail lability claims that could still materialise following the 2020-21 COVID-19 business interruption (BI) claims experience and / or 2021 riots? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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