The art of underwriting

02 December 2020 Gareth Stokes

It is an imperative for stakeholders in the short term insurance industry to understand how the casualty insurance risk landscape is evolving. “Risk is at the centre of what the industry delivers to society and we need to understand how risks assume and evolve,” said Carli Jacobs, Head of Property & Casualty Southern Africa at Swiss Re. Jacobs was on hand at an Insurance Institute of Gauteng event to introduce a presentation titled: ‘Evolving exposure and the changing Landscape of Casualty Losses’. What followed was a comprehensive overview of the challenges facing insurance brokers, insurers and reinsurers in this complex segment of the insurance market.

Separating casualty from liability insurance

René Oefeli, Casualty Specialist in Technical Training at Swiss Re kicked off the conversation by clearing up confusion around the words ‘casualty’ and ‘liability’. He observed that it was common for insurance practitioners to use the words in the same sentence. “Once they use casualty, they use liability,” he said. “This is incorrect because casualty is the overarching term which contains, in our view, three sub-lines of insurance”. The casualty discipline thus includes motor insurance, including accident and assistance; non-life accident insurance, including personal accident, travel insurance and workers’ compensation; and liability insurance. 

Liability insurance, in turn, is a complicated mix of personal liability; property owners’ liability; commercial general liability (CGL) or Broad-form liability; professional indemnity; Directors’ & Officers’; cyber liability; and EIL. Most of the above insurance sub-lines can be included as separate lines on the same commercial policy or written as standalone policies. So, for example, it is common for cyber risks to be covered on a separate cyber liabilities policy. “It is worth noting that CGL policies are normally offered on an all risks approach, meaning that everything that is not clearly excluded in the policy wording is on cover … compared to professional indemnity, where we have a named perils approach,” said Oefeli. A named perils approach means that the policy wording stipulates exactly what is on cover; what is not mentioned is not covered. 

Big respect for commercial brokers

One cannot read the above paragraphs without gaining a renewed respect for the thousands of short term insurance brokers who assist small and medium enterprises (SMEs) with their risk mitigation and risk transfer needs. Aside from a clear understanding of insurance concepts, brokers must navigate their commercial insurance clients through an ever-evolving risk landscape. This is an ongoing challenge that Swiss Re refers to as: “The underwriter’s headache”. Underwriting, to refresh our memories, is the process of assessing risks, determining whether to accept that risk and, if so, an acceptable sum insured and premium for it. Underwriting decisions usually vest with an insurer or underwriting manager, with inputs from insurance brokers or other suitable risk consultants. 

Zaid Bhana, Senior Underwriter at Swiss Re, singled out four drivers of change in the casualty risk environment, including technological advances and scientific knowledge; economic circumstances; social aspects; and legal standards. “Each of these elements increases the potential liability of the policyholder; there are more risks which, because they are new and in addition to known risks, are usually on cover on a CGL basis,” he said. The result is that the premium set during the underwriting process, while applicable under the risk environment that existed at the time, is quickly eroded. One of the great ironies over the past decade is that premiums have been coming down despite increasing risks. 

Unintended consequences of tech adoption

Global responses to COVID-19 have introduced complexities to an already difficult risk landscape. Economies the world over have turned to technology to reinvent the way business was carried out through lockdown under the ‘new normal’ or ‘work from home’ catchphrases. “The [widespread adoption of new technology] is societal; but we still have questions around ethical and legal issues that are not being addressed fully in pace with technological developments,” warned Bhana. There is a risk that technology, instead of addressing all the world’s ills, actually has unintended consequences. One obvious example is the impact of forced isolation on the mental health of communities. 

Swiss Re singled out the potential impact of COVID-19 on casualty experiences as the proverbial elephant in the room. Insurers and reinsurers are scripting their response to pandemic in real time and thus risk getting their ongoing exposures to casualty lines wrong. Calculating these risks is tricky because most casualty risk lines deal with so-called long tail or lag factors. Risk are also significantly altered by the changing environment. An example from the field of Directors’ & Officers’ cover reveals that the increase in insolvencies and restatement of quarterly figures consequent to pandemic introduce countless unforeseen risks. Work from home complicates matters further, introducing various previously unimagined risks. 

Unpacking unique challenges

South Africa will not sidestep the international trends impacting on casualty underwriting. A major concern identified during the discussion was the emergence of class action lawsuits. “My biggest concern on the liability side is class actions, the law allows for it, and it will come more to the fore over time,” said Bhana, referring to the recent listeriosis outbreak that made headlines domestically. Underwriters will have to consider the increased risk introduced to certain casualty lines by this development. 

We conclude with some comment on cyber liability, which was mentioned due to the difficulty in accurate assessments of a policyholder’s long tail liabilities and it being, by its nature, an abstract risk. Cyber is a mixed product that includes both third party and first party liabilities. “You must understand the risk before you underwrite it; a professional risk assessment is key for placing this risk,” said Bhana. One of the biggest challenges facing brokers, insurers and reinsurers has become how to determine their clients’ exposures from operating ‘in the cloud’. 

Writer’s thoughts:
Broad-form liability is one of the most complex lines of commercial insurance to underwrite. It has become more complex due to widescale adoption of technologies in various areas of business and home life. Are you still comfortable when assessing risk for, or estimating potential losses to, your clients when placing cyber liability, broad-form liability and professional indemnity covers, among others?  Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


Added by Ayanda, 02 Dec 2020
After a lecture of this nature, one wonders whether the industry overlords have a new appreciation of the abject uselessness of RE1 and RE5 ... ?
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