www.guycarp.com Systemic Exposures in the Casualty Market …and how to address them September 2010 Grange Turner, Guy Carpenter & Company Ltd, London Contact: +44 207 357 1424 [email protected]Insurance Practitioners Association Conference – Istanbul September 2010
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www.guycarp.com
Systemic Exposures in the Casualty Market…and how to address them
September 2010
Grange Turner, Guy Carpenter & Company Ltd, London
Insurance Practitioners Association Conference – Istanbul September 2010
2Guy Carpenter
Agenda
1. Definitions of event and systemic exposures
2. Examples of clash and systemic exposures
3. Past clash and systemic losses
4. Systemic exposures in a recessionary environment
5. Modelling clash and systemic exposures
6. Methods of protecting against clash and systemic exposures
3Guy Carpenter
1. Definitions of Event and Systemic exposuresWhat do we mean by “clash”, “event” and “systemic”?
Clash – a single loss, or series of losses, deriving from more than one original policy
Event – a loss scenario, usually definable in time and place, which may involve multiple policies
Systemic – exposures derived from a broad industry wide practice, or from a general social or economic trend
Note – these are working descriptions of the terms, not legal definitions.
4Guy Carpenter
2. Examples of Clash and Systemic ExposuresWhat do we mean by an “event”?
Events are generally specific in time and place
General Liability – multiple producers involved in the same faulty product or project
Employers Liability – workers for multiple insureds injured / killed in the same explosion
Motor – multiple vehicles involved in the same accident/Catastrophe
Professional / Financial lines – multiple advisers involved in the same financial collapse (bankruptcy)
Event exposure to different classes of casualty business
5Guy Carpenter
Systemic exposures generally have broader scope than events
General Liability – a similarly faulty manufacturing process leads to numerous similar losses
Employers Liability – a business practice common to a sector leads to a number of similar injury / disease claims
Motor – an increase in the number of accidents caused by unusual weather patterns
Professional / Financial lines – professional advisers from a number of firms following a similar pattern of practice
Systemic exposures to different classes of casualty business
2. Examples of Clash and Systemic ExposuresWhat do we mean by an “Systemic”?
6Guy Carpenter
Natural Catastrophes
Earthquake Hurricane Virus outbreak
Natural Catastrophes
Earthquake Hurricane Virus outbreak
Man-made failures
Terrorist Attack Corporate collapse Infrastructure/ Project failure Major identity theft
Man-made failures
Terrorist Attack Corporate collapse Infrastructure/ Project failure Major identity theft
Business practices
Tax shelters Late Trading in US Mutual Funds Contingent Commission practices Product widely mis-sold
Business practices
Tax shelters Late Trading in US Mutual Funds Contingent Commission practices Product widely mis-sold
Economic malaise
Increase in corporate dissatisfaction House price slump ‘Credit Crunch’ / Recession
Economic malaise
Increase in corporate dissatisfaction House price slump ‘Credit Crunch’ / Recession
2. Examples of Clash and Systemic ExposuresEvent Categories
7Guy Carpenter
3. Past Clash & Systemic LossesA historical perspective…..
Wide range of original types of loss…..
Asbestos – multiple claimants from multiple firms for disease related claims spread over many years
Enron – US corporate collapse which drew in multiple advisers, and other firms with a business link
World Trade Centre – terrorist attack resulting in numerous deaths and injuries (WCA claims) and suits against various professional advisers
Pension opt-outs – multiple investors were wrongly advised to leave their corporate pension schemes
Sub–Prime – numerous failed investment products derived from sub-prime lending practices in the US
Wembley Stadium – architects and building companies involved in late-running construction project
8Guy Carpenter
4. Systemic Exposures in a Recessionary Environment
Events are generally specific in time and place
General Liability – Lack of investment in new plant / equipment – Reductions in the number of suppliers– Reduction in number of workers
Employers Liability – Cut-backs in a firm’s safety schedule– Fewer workers doing same workload– Lack of investment in new plant / equipment
Effects of a recessionary environment on different classes of casualty business
Recession brings increased tendency
to litigation and fraudulent claims
Recession brings increased tendency
to litigation and fraudulent claims
9Guy Carpenter
4. Systemic Exposures in a Recessionary Environment
Motor – Injured parties making claims where previously would not have
done;– Staged accidents– Increased number of fraudulent claims
Professional / Financial lines – Increased tendency to sue professional advisers in event of
investment/business failure– Collapsing property values lead to increased claims against valuers
Effects of a recessionary environment on different classes of casualty business
10Guy Carpenter
Other factors affecting systemic casualty exposures in the long term
Long-tail characteristics
Potential for changes in legal environment
Potential for changes in policy interpretation
Political/regulatory intervention
4. Systemic Exposures in a Recessionary Environment
How many Casualty Cat losses could have been predicted without hindsight?
11Guy Carpenter
Guy Carpenter’s approach to modelling Casualty Clash involves the following;
1. Portfolio Exposure Analysis
Provide a catastrophe profile of your Casualty / Liability portfolio
Identify:– Which portfolio segments are most accumulative; facilitate price loading– Data capture that’s essential in casualty accumulation reporting– How casualty catastrophe losses could impact your portfolio
5. Modelling Clash and Systemic Exposures
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2. Realistic Disaster Scenarios
Customise a classic/systemic cat event set using a uniform network-based system
For each scenario, stochastically model the business relationship links – allowing for type of jurisdiction– providing a distribution of possible outcomes
Demonstrate to stakeholders / regulators that you have a transparent identification process of allocating risk capital to defined long-tail disaster scenarios– a vital part of ERM tool for Solvency II
5. Modelling Clash and Systemic Exposures
13Guy Carpenter
Supply of goods and services to chemical / industrial gas mfg.
– All links included
– Wide range of industry groups
Large hub and spoke arrangement
– Centered industrial gas mfg. (325120), as expected
With two areas of interlinking
– One group centered on primary and fabricated metal product mfg.
– The other around construction, architects & engineers and machinery mfg.
5. Modelling Clash and Systemic ExposuresExample of Business Relationship LinksCase Study: Chemical/Industrial Gas Manufacturer
14Guy Carpenter
Whole Account
Multiple Sectors
Available Coverage
Single Insured
Multiple losses on an ‘Any One
Claim’ form
Mono-Line
More than 1 insured
Same coverage
Non-Systemic
Several Ins’ds/policiesSingle event/ series loss
StandardSystemic
Multi Ins’ds/ Coverages
Event = similar behaviour
Broad Form Systemic
Even broader basis of
accumulation
Sole Judge Systemic
Reinsured is sole judge of
event
Difficulty of defining ‘Event’
Reinsurance capacity
PricingLight
More
Less
Heavy
Less
More
6. Protecting Against Clash and Systemic ExposuresReinsurance Options