David Lewin, Managing Director
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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.

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Emil Metropoulos, Senior Vice President
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Some casualty risk accumulations stay hidden, but this doesn’t mean your exposure disappears. A single event could trigger a chain reaction of insured losses on professional and product liability covers, depleting your capital and possibly destroying shareholder value. In extreme cases, even solvency could be threatened. Using Guy Carpenter’s Casualty Cat model, developed jointly with Arium, Ltd., it’s possible to identify some of these “casualty catastrophe” risks early — before they drain your balance sheet.

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Emil Metropoulos, Senior Vice President
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The global financial crisis that has unleashed havoc on credit and equity markets is the most recent casualty catastrophe (with both systemic and classic clash characteristics), and it may be the largest in recent memory … but it certainly isn’t the first. In fact, there have been many, and their frequency has increased over the past two decades, allowing financial markets little reprieve from one disaster to the next.

The stock market crash of Oct. 19, 1987, kicked off the modern casualty catastrophe age. The Dow Jones Industrial Average lost 22 percent of its value, earning the event the appellation “Black Monday.” Since then, we have endured the initial public offering (IPO) laddering and equity analyst scandals associated with the “dot-com bubble,” as well as accounting irregularities at Enron, Tyco, WorldCom, Adelphia and others. The loss of shareholders’ wealth with each of these events was profound, but none has been as severe as the one that currently has the world’s financial markets in its grasp.

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Carrier Capital Softens the Financial Blow: the market is experiencing a fundamental tension of factors right now.

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Cat Risk Comes Out of Hiding: advances in casualty catastrophe modeling may help protect you from “hidden” portfolio exposures.

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Uncover and Mitigate Product Liability Risk: avert a Casualty Catastrophe: few grasp the full extent of product liability insurance exposure.

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ERM: Part of the Answer to Financial Catastrophes: while hurricanes spun through the Gulf of Mexico last month, a larger catastrophe ripped through New York, London, Shanghai, and every other major financial center in the world.

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Models Rise to Flooding Challenge: most models have not been able to address the complexity of this peril, rendering targeted risk management impossible.

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Most Popular Keyword: casualty cat (i.e., casualty catastrophe)

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Multi-Year Cover Gaining Steam in LA&H: the use of multi-year cover for accident and health lines of business, though in its infancy, could be the next step in mitigating risk and reducing ambiguity.

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Emil Metropoulos, Senior Vice President
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When mega-catastrophes occur, we tend to think about large-scale property damage. Until recently, hurricanes, earthquakes, and terror dominated the conversation. A new type of catastrophe has emerged, however, with the potential to cause more economic damage and perhaps even higher insured losses. Casualty catastrophes involving product and professional liability can spread quickly, destroy considerable amounts of shareholder wealth, and take years to resolve completely. In the past, carriers were unable to address this form of risk sufficiently, and balance sheets have remained imperiled.

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Emil Metropoulos, Senior Vice President
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Danger routinely enters product supply chains. An error at a plant or even a flawed product design could lead to extensive economic damage. While the direct cost of these events comes to mind first, few grasp the full extent of product liability insurance exposure. The integrated business relationships required to bring a product to market mean that one event could trigger a “casualty catastrophe” that sweeps up component manufacturers and distributors – and their insurers.

Casualty Cat, a new model developed jointly by Guy Carpenter and Arium, Ltd., seeks to identify the hidden product liability accumulations in a carrier’s portfolio and delivers the insights needed for informed action.

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David Lewin, Head of International Casualty
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Sometimes, a single incident can trigger a chain reaction. Before you realize what has happened, economic damage has mounted, and claims are being filed. Particularly surprising is that the companies being affected were not really involved in the initial event. This risk, “casualty catastrophe,” has become increasingly frequent and severe in recent years, yet casualty writers remain exposed. The threat is difficult to detect, as it arises from the connections among businesses rather than a specific peril. Consequently, casualty catastrophe has been almost impossible to analyze and mitigate. New modeling techniques, though, may help (re)insurers manage their capital more effectively.

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A Year in Review – 2007 Update: Issues and Trends Affecting the Liability Market in England and Wales is the fifth in our annual series dedicated to the evolving issues that characterize the liability market in England and Wales. This year we consider many trends identified in previous installments of this series, ascertain the extent to which they have become established, and explore which will persist in the future.

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