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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)
2
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
1
3
How will liability insurers react? 4
3
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
1
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.
4
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
1
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
7
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
9
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
2
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
10
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
11
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 %
2
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
12
-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 )
2
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)
2
Sources: A.M. Best, SNL, Centers for Medicare and Medicaid Services
13
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
2
14
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
15
3
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
3
17
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
3
80
90
100
110
120
130
140
150
160
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
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
18
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 )
4
19
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 )
4
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.
2 0
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
21
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Thank you
2 2
ACCE meeting in Paris, 24 March 2015 | Roman Lechner | Economic Research & Consulting
Legal notice
23
©2015 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.
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