Liability Claims Trends: Emerging Risks and Rebounding Economic Drivers

Transcription

1 Liability Claims Trends: Emerging Risks and Rebounding Economic Drivers Roman Lechner 17 th Meeting of The Geneva Association s Annual Circle of Chief Economists Insurance Prospects in a Changing Risk Environment March 2015, Paris [email protected]

2 Liability claims trends: emerging risks and rebounding economic drivers Roman Lechner, Economic Research & Consulting ACCE meeting in Paris, March Roman Lechner Economic Research & Consulting 1

3 About Swiss Re's Economic Research & Consulting (aka the sigma team) 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 / sigma / 2

4 Outline Size and structure of the liability markets Claims growth trends: the economic drivers Forecast Select social of future and legal claims claims growth drivers How will liability insurers react? 3

5 1 Liability insurance is a USD 160 billion market Premiums & GDP (USD billions) Rank Liability Total Non-Life GDP Percentage Shares Liability/ Total Non-Life Liability/ GDP 1 US ' % 0.50% 2 UK ' % 0.3 9% 3 Germany ' % 0.2 1% 4 France ' % 0.2 5% 5 Japan ' % 0.1 2% 6 Canada ' % 0.2 9% 7 Italy ' % 0.2 4% 8 Australia ' % 0.3 2% 9 China ' % 0.0 4% 10 Spain ' % 0.1 6% Top '150 46' % 0.29% World 160 1'550 61' % 0.26% 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. 4

6 1 Anglo-american countries with the highest liability insurance penetration Asian countries with the lowest Liability premiums 2013, as % of GDP 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.50% 0.39% 0.32% 0.29% 0.25% 0.24% 0.21% 0.16% 0.12% 0.04% 0.26% 0.00% 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. 5

7 Claims growth -the economic drivers 6

8 2 Liability claims are growing stronger than GDP (1) General liability claims incurred as a % of GDP 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% US [1] Canada [1] UK [1] Germany France Italy [1 ] net of reinsurance Source: Swiss Re Economic Research & Consulting 7

9 2 Liability claims are growing stronger than GDP (2) 0.5% 0.3% 0.4% 0.2% 0.3% 0.2% 0.1% 0.1% General liability claims incurred as a % of GDP Canada [1] UK [1] Germany France Italy 0.0% US [1 ] Canada [1] UK [1] Germany France Italy Source: Swiss Re Economic Research & Consulting? Traditionally, liability claims grow faster than GDP. The decline in claims that began in 2004 was prompted by a turn in the reserves cycle. After 2008, underlying claims trends slowed down due to the global recession. [1] net claims 8

10 2 Long-run growth trends in liability claims, % 2% 7% 1% 6% 0% 5% -1% 4% -2% 3% -3% 2% -4% 1% -5% 0% US [1] Canada [1] UK [1] Real claims growth Germany [2] France [2] GDP real growth Italy [2] -6% US [1] Canada UK [1] [1] Real claims growth Germany [2] France [2] Italy [2] GDP real growth Change in claims growth since the financial crisis: cyclical development or secular trend? 9

11 2 Long-run growth trends in liability claims, % 7% 6% 5% 4% 3% 2% 1% 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. 0% US [1] Canada [1] UK [1] Germany [2] France [2] Italy [2] Real claims growth GDP real growth US Canada UK Germany France Italy Elasticity (nominal) Correlation coefficient 14% 23% 14% 50% 27% 70% 10

12 2 Long-run growth trends in liability claims, 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. US Canada UK Germany France Italy Elasticity Correlation coefficient 0% 29% 17 % 40% 28% 70% Multi-year trends in claims growth are correlated with Medical expenditure growth (highly) in the US Consumer price and wage inflation in European countries 11

13 2 Range of expected claims growth based on historic economic relationships Range of expected claims growth ( ) vs recent growth ( ) 10% 8% 6% 4% 2% 0% -2% -4% US Canada UK Germany France Italy Recent growth ( ) Expected claims growth ( ) 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 12

14 2 Decelerating health care expenses fuelled reserves releases in the early 1990s and since 2006 Health care expense growth vs reserves changes (% of NPE) 14% 12% 10% 8% 6% 4% 2% 0% Core reserve change as % NPE [right] HCE per capita growth [left] Total reserve change as % NPE [right] 8% 6% 4% 2% 0% -2% -4% -6% CPI inflation is not an important driver of claims costs. Health care expense (HCE) growth is the most significant macro driver. HCE growth decelerated in the early 1990s and lately in Core reserves releases in were partially absorbed by adverse development for A&E. Under-reserving of soft market years needed to be offset by adverse development in hard market Current reserves releases (since ~ 06) are windfall gains from decelerating HCE and benign claims severity. Sources: A.M. Best, SNL, Centers for Medicare and Medicaid Services 13

15 2 Loss reserves are less redundant More recent accident years could develop negatively if claim costs accelerate US other liability accident-year loss ratios 75% 70% 65% 60% 55% 50% 45% '04 - '07 developed strongly '09-12 no systematic releases The 0 4 through 07 underwriting years resulted in large reserves releases over time. Recent underwriting years (09 12) had higher initial loss ratios and did not develop systematically. The years since '09 account for about 8 0 % of the non-legacy reserves on the balance sheets. The pattern of falling loss ratios has been slowing. Future reserves changes may in aggregate turn negative. Sources: SNL, Economic Research & Consulting 14

16 3 Summary 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 15

17 Cyber risks Hydrofracking Social, technological, and legal claims drivers Risk accumulation Collective redress Tort reform Autonomous cars Litigation funding 16

18 3 Selected social and legal claims drivers 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. Risk 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. 17

19 3 Cyber risk and emerging technologies, such as hydrofracking, may become more prominent in liability US oil and gas production Volume index (1997=100) Number of cyber claims worldwide (2013) By industry, % of total claims Telecommunication Hospitality Other/unknown Entertainment Non-profit Education Technology Professional services Retail Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Financial services Healthcare

20 4 Strategic implications for insurers (1/2) 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. 19

21 4 Strategic implications for insurers (2/2) 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. 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. 20

22 Conclusions 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. 21

23 Thank you 22

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