Indications of an economic recovery and fairly flat renewal are already beginning to obscure the experience of the past year. For professional liability insurers, this is particularly disconcerting, for even as balance sheets grow stronger, the implications of the largest casualty catastrophe in more than 70 years are still unfolding. The lawsuits and claims may take years to resolve, suggesting that the effects of September 2008 will be with us for quite a while. As the situation develops, professional liability insurers should use what they learn to revisit accumulations in their portfolios and take action to protect their capital — and shareholder value — from future worldwide chain reactions of liability exposure.
Though the most recent casualty catastrophe was financial, this phenomenon can strike any industry. Quite simply, a casualty catastrophe is an event in which risk spreads rapidly across industries and borders, transmitting exposure along a variety of common trading relationships. As a result, claims may be filed against companies that seem to have little in common with the root cause. Product recalls, precipitous stock price declines and a host of other events can trigger casualty catastrophes, ultimately impacting auditors, lawyers, investment banks and just about every link in a company’s supply chain. Given the depth and breadth of today’s business relationships — in which integration and cooperation are no longer rewarded but, rather, are required — liability carriers may be assuming more risk than they realize.
Complex and interrelated operations among original insureds have created hidden accumulations of risk in many insurers’ portfolios. Unfortunately, locating and remedying them is difficult, as a risk manager would have to trace relationships through industries and regions to ascertain the effects of countless liability scenarios. Historically, casualty catastrophe risk is one that carriers have had to assume, with few options available for targeted, accurate risk management. With the frequency and severity of casualty catastrophes growing, however, insurers would be unwise to accept a risk that cannot be understood. Yet, to write professional and product liability business, there has been no alternative.
The solution to this dilemma is modeling. Until recently, the data and technology available to cedents were insufficient to address the casualty catastrophe threat. Guy Carpenter’s Casualty CatTM model, though, developed jointly with Arium, Ltd., changes the situation: now, liability insurers have a way to assess the accumulated liability risk concealed by the very relationships vital to their clients’ survival in a global economy. Casualty Cat helps insurers identify risks, accumulate their implications and make educated risk transfer decisions. The modeling platform analyses the ways in which an event’s implications can spread — across liability insurance classes, legal forums and industry codes — to develop a risk accumulation profile and suggest a starting point for risk transfer planning and execution.
The ultimate goal of Casualty Cat — and casualty catastrophe risk management in general — is to protect shareholder value. The effects of unanticipated insured losses on company earnings tend to be magnified in market capitalization, so the efforts made within a risk portfolio translate to the creation (or preservation) of tangible value. The ability to control and minimize the potential financial damage resulting from a casualty catastrophe thus becomes a profound differentiator among casualty insurers for all stakeholders — from original insureds to investors.
The financial crisis will remain with the casualty insurance sector for years to come. Even if today’s stability provides some near-term relief, it is still crucial that carriers begin to think about the next casualty catastrophe, whatever form it may take. Rather than blindly assume catastrophe risk, risk managers can use Casualty Cat to probe the accumulation propensities of their portfolios and make the shareholder value-accretive decisions that will define the market’s leaders when the next casualty catastrophe strikes. The risk management tools are now available — all that’s needed is action.