Taming the Casualty Industry

In property, you know that natural disasters are going to happen sooner or later, but in casualty how do you identify the emerging catastrophic risks?

We rely upon scientific evidence. So if you’re looking at litigation over bodily injury, like asbestos, or litigation over things like water damage, like MTBE [methyl tert-butyl ether, a gasoline additive], or today litigation over per-fluorinated chemicals—all of this has a footprint in scientific literature before the litigation begins. Not only that, but the scientific information is necessary in order for the litigation to get traction.

We try to find where there are new hypotheses in scientific literature investigating commercial activity or commercial products that might cause bodily injury or latent property damage or environmental damage. We track that hypothesis as it goes from one or two articles to 10 articles to 500 articles. As that happens, we are increasingly mining the literature to try to understand exactly…the blueprints for potential litigation that are present or embodied in that scientific literature, and we turn that into scenarios of potential future mass litigation.

What emerging casualty risks should insurers and brokers be thinking about?

First of all, it’s worth noting that we think that emerging risk is an overly broad category. The way we approach it is that we believe that there are three phases of emerging risk. Depending upon the phase, who should be interested and what they should do will change. It’s important to understand that it differs by category.

The earliest phase is what we call emerging interest. This is where you are simply beginning to investigate scientific hypotheses that there might be bodily injury and it’s too early to even put a probability around it because it’s just at the stage of investigation.

We have a whole set of things that we are concerned with. For instance, there is new scientific literature around the use of new nano materials in food packaging. There are some articles that are investigating whether or not the nano material migrates out of the packaging and into the food and whether or not, if it does, it might cause bodily injury. It’s early stage and probably will come to nothing, but corporations that are using these types of products need to know about this and insurers need to know about the potential that this literature could evolve into something greater.

Then the literature is going to evolve, and it goes into a phase we call emerging damage. In the emerging damage phase, the literature is getting richer. They’re investigating specific issues about who might be harmed and how they might be harmed and what products might be causing harm. One of our emerging-damage agents is a chemical called melamine. Melamine is also a plastic. It is used in things like bamboo cups, and it’s used in building products and insulation materials. There is growing scientific literature around not only its persistence in the environment—therefore it could be a water issue—but also on its potential to cause bodily injury. This is where we say insurers should be thinking about taking underwriting actions. Corporations should definitely be monitoring this literature and thinking about substituting. But they definitely need to be thinking about how much coverage they have in case it’s crucial to their product—they may be underinsured, but there is no litigation yet.

The last phase is emerging litigation. In that, we’ve got a growing number of risks, largely because of social inflation. We can talk about opioids and talc and glyphosate, which is the active ingredient in Roundup. Our No. 1 risk in emerging litigation risk is the PFAS chemicals, the per-fluorinated and poly-fluorinated chemicals which are newly involved in a whole set of litigation over fire-fighting foam running off of runways and causing local water damage, over bodily injury among firefighters, and over environmental damage against companies like DowDuPont and 3M. That could get much larger. It’s a scenario where insurers need to think about whether they want to cover it at all, and brokers and agents need to be working with their clients on how this risk can be managed and probably defended.

Talking about emerging litigation, what are the big exposures that you’ve identified with COVID?

COIVD-19 is definitely one of the issues in our emerging-litigation bucket. We think the largest risk is the take-home COVID. From the perspective of insurers, there is definitely the risk of litigation, let’s say against nursing homes. There also has been a lot of litigation against the cruise ships. But these are fairly narrow areas in the sense that it’s specific industries. The take-home COVID issue is where a worker is exposed at work and then brings it home to their family and their family member may die. That issue is among all of the essential industries. It involves retail and meatpacking and healthcare and construction. There is a lot of insurance risk exposed. It’s small and medium and large companies. It has a such a large industrial footprint that we say that’s the largest insurance risk. We estimate that the risk could be, as a tail risk, in the tens of billions—say $20 billion would be a reasonable number to put out. A lot of it is going to depend upon the outcome of some early take-home COVID cases.

One of the issues from a broker perspective is that there is just a crazy range of exclusions on liability that have emerged over COVID-19 in recent months. There are infectious disease exclusions, pathogen exclusions, coronavirus exclusions, COVID-19 exclusions. They vary from insurer to insurer, and it’s a cacophony of exclusions. That’s a really challenging issue to navigate for brokers and their clients. It is something definitely that needs to be streamlined, particularly as there are ongoing risks of pandemic in the future. Most scientists are saying that, while COVID-19 may be historically a one-in-a-100-year event, going forward it’s probably not.

Can you talk about cross-line clash exposures, when a GL exposure spills over into D&O?

That is a growing development. If you were to look back at D&O 10 years ago, almost all of it was about earnings restatements. A lot of that was pretty much separate from anything that was happening in GL. What’s happened over the last 10 years has been a growing tendency for D&O claims to emerge around issues that are in the operations of the company rather than just in the accounting. Those operations issues are things for which there are often GL claims as well. With Roundup, there has been a D&O claim as well as all of the GL claims. With talc, there has been a D&O claim against J&J. With PFAS, there has been a 3M D&O claim. With COVID-19, the defendants with the largest number of GL claims at this point are Carnival and Princess cruise lines, and there is also a D&O claim. A law professor at Columbia, John Coffee, recently wrote an article saying that D&O is the caboose of the mass tort train. From an insurance perspective, this means if you are going to get a mass tort you are going to get a cross-line clash.

How are tools like those you’ve developed changing underwriting?

For insurers, we are transforming the way in which they approach emerging risk. A few years ago, a typical emerging risk function for an insurer would be a committee of executives that meets periodically and talks about things they may have seen in claims or maybe have read in the newspaper. Increasingly though it is a discipline that has specialists deploying specialized technologies and software products that inform underwriting actions in addition.

All of this will lead to a more sustainable casualty insurance industry. Once it is fully absorbed into the workflows of the industry, you won’t see the wild swings you’re seeing today where you have these hard markets and doubling of premium and shortages of coverage availability, followed by multiyear soft markets. I don’t think that will go away, but it will definitely be reduced, which will make it easier for the agents and brokers working with their clients.

Along the way, as there is better awareness and more rigorous identification and quantification of emerging risks, new specialist casualty products will emerge. We have a major engagement with a reinsurance broker around the development of new reinsurance products that will allow insurers to transfer their exposures on a named peril basis to reinsurance and ultimately to capital markets. This will mean new products, new opportunities for coverage. I think we’ll end up addressing the coverage gap and we’ll end up with a much more sustainable and less volatile casualty industry.