www.genevaassociation.org [email protected]
Liability Claims Trends: Emerging Risks and Rebounding
Economic Drivers
Roman Lechner
17th Meeting of The Geneva Association’s Annual Circle of Chief Economists
“Insurance Prospects in a Changing Risk Environment”
24-25 March 2015, Paris
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting 1 1
Liability claims trends: emerging risks and rebounding economic drivers Roman Lechner, Economic Research & Consulting
ACCE meeting in Paris , 2 4 March 2 0 1 5 | R oman Lechner | Economic R esearch & Consulting
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
About Swiss Re's Economic Research & Consulting (aka the sigma team)
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http:/ / www.swissre.com/ sigma
http:/ / www.sigma-explorer.com/
• Economic Research & Consulting monitors and analyses the economic and capital market environments and insurance markets.
• Team of 28 persons, mostly economists, led by Kurt Karl
• Zurich, New York (Armonk), Hong Kong, Bangalore
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Outline
Claims growth trends: the economic drivers Claims growth trends: the economic drivers 2
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3
How will liability insurers react? 4
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S ize and structure of the liability markets
Forecast of future claims growth Select social and legal claims drivers
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Liability insurance is a USD 16 0 billion market
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Rank Liability Total Non-Life GDPLiability/Total
Non-Life Liability/GDP1 US 84.0 531.2 16 '802 15.8% 0.50%2 UK 9.9 99.2 2 '521 10.0% 0.39%3 Germany 7.8 90.4 3 '713 8 .7% 0.21%4 France 6.8 83.1 2 '750 8 .2% 0.25%5 Japan 6.0 81.0 4 '964 7 .3% 0.12%6 Canada 5.2 50.5 1 '823 10.3% 0.29%7 Italy 5.0 47.6 2 '073 10.6% 0.24%8 Australia 4.8 32.7 1 '506 14.8% 0.32%9 China 3.5 105.5 9 '345 3 .3% 0.04%
10 Spain 2.2 31.0 1 '361 7 .0% 0.16%Top 10 135 1'150 46 '900 11.8% 0.29%
World 160 1 '550 61 '700 10.3% 0.26%
Percentage SharesPremiums & GDP (USD billions)
With premium income of USD 160 billion in 2013, liability insurance accounted for 10% of global non-life premiums, or 23% of the global commercial lines premiums.
93% of liability premiums are from advanced markets.
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting 5
Anglo-american countries with the highest liability insurance penetration – Asian countries with the lowest Liability premiums 2 013 , as % of GDP
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0 .5 0 %
0 .3 9 %
0 .3 2 % 0 .2 9 %
0 .2 5 % 0 .24 % 0 .21 %
0 .16 % 0 .12 %
0 .0 4 %
0 .2 6 %
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
Case law, highly developed tort system & litigation culture are the main reasons for higher significance of liability claims in Anglo-American countries.
Tort laws and access to courts are key for the development of liability markets.
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting 6
Claims growth -the economic drivers
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
1975 1980 1985 1990 1995 2000 2005 2010
US [1] Canada [1] UK [1] Germany France Italy
Liability claims are growing stronger than GDP (1 )
[1 ] net of reinsurance Source: Swiss R e Economic R esearch & Consulting
General liability claims incurred as a % of GDP
2
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
0.0%
0.1%
0.2%
0.3%
1975 1980 1985 1990 1995 2000 2005 2010
Canada [1] UK [1] GermanyFrance Italy
Liability claims are growing stronger than GDP (2 )
Source: Swiss R e Economic R esearch & Consulting
Traditionally, liability claims grow faster than GDP.
The decline in claims that began in 2 0 0 4 was prompted by a turn in the reserves cycle.
After 2 0 0 8 , underlying claims trends s lowed down due to the global recession.
?
General liability claims incurred as a % of GDP
2
8
[1 ] net claims
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
1975 1980 1985 1990 1995 2000 2005 2010
US [1] Canada [1 ] UK [1] Germany France Italy
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
1975-2008 2008-2012
Long-run growth trends in liability claims, 1975 -2 012
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0%
1%
2%
3%
4%
5%
6%
7%
8%
US [1] Canada[1]
UK [1] Germany[2]
France[2]
Italy [2]
Real claims growth GDP real growth
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
US [1] Canada[1]
UK [1] Germany[2]
France[2]
Italy [2]
Real claims growth GDP real growth
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Change in claims growth s ince the financial cris is : cyclical development or secular trend?
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
0%
1%
2%
3%
4%
5%
6%
7%
8%
US [1] Canada[1]
UK [1] Germany[2]
France[2]
Italy [2]
Real claims growth GDP real growth
• General liability claims rose roughly 1 % for every 1 % rise in GDP in the UK and France and 1.4 % in Canada and Italy. The US and Germany ranked in between.
• Correlations were comparably strong in Germany and Italy, but weak in the other markets .
Long-run growth trends in liability claims, 1975 -2 0 0 8
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US Canada UK Germany France Italy
Elasticity (nominal) 1.10 1.4 2 1.0 8 1.2 3 1.01 1.4 3 Correlation coefficient 14 % 2 3 % 14 % 5 0 % 27 % 7 0 %
1975-2008
2
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
• In the major markets , liability insurance claims have also risen faster than general inflation (CPI)
– The ratio of liability claims growth to CPI inflation ranged from 1.5 in France to 2 .4 in Canada.
– Correlations were comparably strong in Italy, but very low in other countries .
• Multi-year trends in claims growth are correlated with
– Medical expenditure growth (highly) in the US
– Consumer price and wage inflation in European countries
Long-run growth trends in liability claims, 1975 -2 0 0 8
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US Canada UK Germany France Italy
Elasticity 1.74 2 .3 4 1.72 2 .13 1.51 1.9 5
Correlation coefficient 0 % 2 9 % 17 % 4 0 % 2 8 % 7 0 %
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
• US, Canada, and the UK have the highest GDP forecasts , France and Italy the lowest
• The UK and France have historically shown low growth of claims in relation to GDP
• Canada and Germany have historically high correlations of claims growth to wage and CPI inflation
Range of expected claims growth based on historic economic relationships
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-4%
-2%
0%
2%
4%
6%
8%
10%
US Canada UK Germany France Italy
Range of expected claims growth (2 014 -2 0 ) vs recent growth (2 0 0 8 -12 )
R ecent growth (2 0 0 7 -2 0 1 2 ) Expected claims growth (2 0 1 4 -2 0 2 0 )
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
CPI inflation is not an important driver of claims costs . Health care expense (HCE) growth is the most s ignificant macro driver.
HCE growth decelerated in the early 19 9 0 s and lately in 0 2 – 0 8 .
Core reserves releases in 91 – 9 6 were partially absorbed by adverse development for A&E.
Under-reserving of 9 6 – 0 0 soft market years needed to be offset by adverse development in hard market 01 – 0 4 .
Current reserves releases (s ince ~ 0 6 ) are windfall gains from decelerating HCE and benign claims severity.
Decelerating health care expenses fuelled reserves releases in the early 19 9 0 s and s ince 2 0 0 6
-6%
-4%
-2%
0%
2%
4%
6%
8%
0%
2%
4%
6%
8%
10%
12%
14%
1990 1995 2000 2005 2010
Core reserve change as % NPE [right]HCE per capita growth [left]Total reserve change as % NPE [right]
Health care expense growth vs reserves changes (% of NPE)
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Sources: A.M. Best, SNL, Centers for Medicare and Medicaid Services
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
• The 0 4 through 07 underwriting years resulted in large reserves releases over time.
• Recent underwriting years (0 9 – 12 ) had higher initial loss ratios and did not develop systematically.
• The years s ince '0 9 account for about 8 0 % of the non-legacy reserves on the balance sheets .
• The pattern of falling loss ratios has been s lowing. Future reserves changes may in aggregate turn negative.
Loss reserves are less redundant More recent accident years could develop negatively if claim costs accelerate
US other liability accident-year loss ratios
45%
50%
55%
60%
65%
70%
75%
2004200520062007200820092010201120122013
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013'0 4 - '0 7
developed strongly
'0 9 - 1 2 no systematic
releases
Sources : SNL, Economic R esearch & Consulting
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
•Economic growth will drive exposure growth >4% in advanced markets p.a ; 8% in HGM
•The usual claims dynamics will come back i.e. GDP elasticity of >1
•When claims costs accelerate, more recent accident years could develop negatively
• i.e. rates will rise - eventually
Summary
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting 16
Cyber risks
Autonomous cars
Hydrofracking
Tort reform
Collective redress
Litigation funding
R isk accumulation
Social, technological, and legal claims drivers
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Beyond the economic drivers , there are emerging liability trends which are rooted in either changing exposures or the development of the legal (tort) system.
1 . R isk accumulation is a growing threat to insurers .
2 . Fracking: drilling and risk awareness are expanding.
3 . Cyber risks are complex and spread rapidly.
4 . Autonomous cars : legal issues lag technological progress .
5 . The effects of tort reform in the US and Australia are unclear.
6 . Third-party litigation funding is spreading.
7 . The scope of collective redress in Europe is growing.
Selected social and legal claims drivers
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Cyber risk and emerging technologies , such as hydrofracking, may become more prominent in liability
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80
90
100
110
120
130
140
150
160
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
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Jan-
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Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
2 9 .3
1 5
1 2 .8
1 0 .7
7 .9
7 .1
6 .4
2 .9
2 .9
2 .9
2 .1
Healthcare
Financial services
Retail
Professional services
Technology
Education
Non-profit
Entertainment
Other/unknown
Hospitality
Telecommunication
US oil and gas production Volume index (1997=100)
Number of cyber claims worldwide (2 013 ) By industry, % of total claims
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Product innovation is necessary to adapt policies to technological and regulatory changes.
• Cyber, environmental and nanotechnology risks require new products and specialized underwriting.
• Technological developments will facilitate product innovation in liability insurance.
Underwriting quality is key
• Successful insurers have outperformed through underwriting expertise.
• Availability and quality of data is a key challenge for liability underwriting.
• Insurers must monitor and assess emerging risks that could lead to casualty risk accumulation.
• Predictive modelling is critical for improving underwriting quality in liability insurance.
Strategic implications for insurers (1 /2 )
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Behavioural biases in underwriting – implications for insurers
• Understanding the most common cognitive biases may help underwriters to counter the potential negative results . This is particularly relevant for liability underwriting, given the issues of parameter uncertainty and asymmetric information.
Strategic implications for insurers (2 /2 )
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Big Data, predictive modelling, and forward-looking modelling
• The use of Big Data and predictive modelling in commercial lines is increasing.
• Analytics applications can also be employed in fraud detection, in identifying drivers of unexpected claims development, and more.
• The use of Big Data can expand insurability.
• W ith product innovation, insurers can continue to adapt insurability to the changing risk landscape.
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
• Underwriting expertise is a key competitive advantage, while a lack of underwriting experience can hinder new entrants .
• W ith product innovation, insurers can stretch the boundaries of insurability to meet the demands of the changing risk landscape.
• International strength is important to support clients in a global economy.
• Strong capitalization is an essential part of the value proposition to insurance buyers , particularly for the long-tail casualty lines.
Conclusions
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Thank you
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ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
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