Viewpoint: The shifting landscape of casualty insurance

As we emerge from the shadow of Covid-19, buyers of casualty insurance are facing a mixed risk picture, with challenging economic conditions beginning to bite and evolving exposures on the horizon.

The pandemic was an unprecedented period for businesses and individuals the world over. And for buyers and underwriters of casualty insurance, the aftermath of the pandemic poses a particular challenge.

Casualty is a long-tail class of business in which, historically, underwriters have looked to the past to understand claims trends and predict future patterns. 

During the pandemic, there was a general slowdown in activity, notably in sectors like hospitality, travel, education and entertainment, among others. 

This meant there was also a slowdown in certain casualty claims and very few casualty claims for which the proximate cause was Covid-19 – in contrast to other lines of insurance such as business interruption, for example. The volume of court cases for issues other than Covid-related business interruption litigation also reduced dramatically.

Underwriters, therefore, have a lack of recent claims activity to help them understand trends and exposures. To address this challenge, they need risk managers and brokers to provide robust data, covering as long a time period as possible, and information to enable them to better understand potential exposures and underwrite coverage accordingly.

As underwriters we also need to play our part in facilitating this communication to ensure our clients’ exposures are assessed, managed and transferred.

Emerging risks

Against this backdrop, there is a swath of emerging and evolving risks we (and our clients and brokers) need to consider. 

Intrinsically, these new risks do not present claims experience and history to help predict future trends. This means we need good data and accurate risk information from our clients and brokers and continued dialogue with them to help us better understand – and underwrite – these  risks.

We work with experts to try to gain a deep understanding of the many emerging risks that affect casualty insurance buyers now – and could affect them in the future. For example, the growing volume of litigation surrounding per-and-polyfluroalkyl substances (PFAS) – so-called  “forever chemicals” – is one such risk.

Between July 2005 and March 2022 there were more than 6,400 cases filed in US federal courts relating to PFAS, which have been widely used in consumer products and about which there are growing concerns regarding their effect on the environment and human health.

PFAS litigation has been dubbed by some the “next asbestos” and, while we all hope this turns out to be an exaggeration, it is certainly important we seek to understand our clients’ potential exposures, the litigation trends in this area and the general direction of travel.

Economic headwinds

The economic climate poses another challenge for our risk manager clients as well as for underwriters. The cost of living crisis, rising interest rates and high levels of inflation are combining to mean we expect to see an uptick in the frequency of claims.

Casualty claims typically increase in frequency during recessions, for a variety of reasons including underinvestment in building maintenance, for example. It has also historically been the case that fraudulent claims tend to increase during recessionary periods as well.

With these economic conditions expected to last until at least the year-end if not beyond, our clients are readying themselves for a rapid increase in claims frequency – following the period of stagnation during the pandemic.

As life returns to “normal” we are already seeing evidence of an increase in claims volume.

The better the information our clients can give us and the better the dialogue between us, the better we can understand where these claims are likely to arise and how to help.

Social inflation and litigation

The increasing tendency of societies to turn to litigation when things are perceived to have gone wrong has been a trend for some time now. Some territories have long been known to be more litigious than others, but we are seeing newer pockets of social inflation that might gain in importance in the coming months and years.

It is often the case that as economies develop and a middle class grows, claimant lawyers become more active. We are closely monitoring territories in which social inflation is beginning to increase and where our clients have operations or exposures.

But while many jurisdictions are becoming increasingly litigious, there have also been some recent moves to curb spiralling legal costs and ensure insurance coverage remains affordable.

In Ireland, for example, the Action Plan for Insurance Reform, published last autumn, includes proposed amendments to the Personal Injuries Assessment Board Acts intended to reduce the number of personal injury claims that go to litigation, reduce the number of fraudulent claims and ensure insurance coverage remains available and affordable.

This is a welcome development for both buyers of insurance and underwriters who have been challenged by escalating court awards and the knock-on effect of increasing insurance premiums in Ireland for many years. 

Again, in this area we work with external legal experts as well as our clients and their brokers to understand the implications of any developments – positive or negative – that might affect the future claims picture.

Buyers of casualty insurance are well aware of the economic pressures facing their own businesses and the impact these challenges may have on claims. 

There will be continued economic uncertainty for some time, and, coupled with an evolving risk picture and likely increase in claims frequency, this underlines the need for good dialogue between risk managers, their underwriters and brokers and quality information and data.

Those businesses that can demonstrate risk management improvements and the impact of those improvements on claims will see them reflected in their casualty insurance premiums. 

We are keen to work in partnership with our clients during these challenging and changing times as we all seek to understand how the future will shape up. 

Mike Reid is executive vice-president and head of casualty, international insurance at Sompo International