October 27th, 2008

Casualty Cat: Revealing Hidden Accumulations in Casualty Portfolios

Posted at 11:00 AM ET

David Lewin, Head of International Casualty

Casualty risk is inherently complex. Few insurers and reinsurers manage the accumulation risk in their casualty portfolios. The right tools simply have not been available to identify and analyze this unique peril. Innovation is catching up with the dangers that carriers face, though. New solutions are making the prospect of a casualty catastrophe—and the estimation of realistic disaster scenario costs—a bit less daunting.

The relationships that shape contemporary commerce have changed faster than the tools used to manage professional liability risk. Carriers have been forced to hedge by line of business—virtually in silos—depriving them of the capabilities to gauge and transfer casualty accumulation risks across different insured activities and lines of business. This has caused a gap in cover, as (re)insurers have tried to ascertain likely situations and gear their risk management strategies to an entangled totality which has been almost impossible to assess.

Casualty catastrophe risk follows trading patterns. One company’s exposure can extend through its partners, suppliers, and clients. A triggering event—such as a product recall, failed strategic initiative, or financial collapse—can send aftershocks through investment bankers, external auditors, advisors, and enterprise software providers…to name but a few of the potentially responsible parties. As plaintiff attorneys assemble class actions and probe “opportunities” for deep pockets, many companies (and their professional and product liability carriers) may be surprised to find that they are targets. Settlements and judgments eventually flow up to casualty writers and their reinsurers, which could face much larger claims than they expect.

Fortunately, risk management technology has been developed to help risk-bearers cope with the casualty catastrophe problem and provide a scientific process for quantifying likely situations. Guy Carpenter’s Casualty Cat model, developed jointly with Arium, Ltd., targets casualty catastrophe exposures. The platform helps (re)insurers identify risks, accumulate their implications, and make educated risk transfer decisions. Casualty Cat looks at the ways in which an event’s implications can spread—across both borders and industries—to develop a risk accumulation profile and suggest a starting point for planning and execution.

No longer concealed by the intertwined relationships that characterize the global economy, casualty catastrophe risks become knowable and, as a result, manageable. Casualty Cat provides a platform for informed, effective action.

(Re)insurers tune the risks in their portfolios carefully to make their capital as productive as possible. Casualty catastrophe risk has been a barrier to these efforts, though, forcing carriers to accept difficult-to-quantify exposures with the potential to drain balance sheets and even imperil solvency. The risk to solvency caused by realistic casualty disaster scenarios needs to be assessed. Improvements to modeling are transforming the management of this risk, and Casualty Cat enables those who cover casualty to do so while protecting their capital.

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