Managing the rising emergence of long-tail casualty claims

Marcus Winter:

Hello and welcome to Nothing Assumed. A quick talk on topics that keep the reinsurance industry up at night. My name is Marcus Winter, and today it is my pleasure to welcome my colleagues, Leah Spivey. Leah is our Chief Claims Officer for the reinsurance in North America here at Munich RE US. And Maura Freiwald, she's the Head of Casualty for Munich RE US, and today we will discuss the issues surrounding the US casualty market with a focus on long-tail casualty claims. Leah, Maura, thank you very much for joining me today to discuss those important topics.

Leah Spivey:

Thanks for having me, Marcus.

Maura Freiwald:

Happy to be here, Marcus.

Marcus Winter:

Many reinsurers are seeing emergence of long-tail claims of late. Can you explain why that is?

Leah Spivey:

Actually, there's a variety of reasons on several different claim types, starting with workers' compensation, personal injury protection, sexual abuse, environmental and asbestos talc claims, many of them are becoming an issue. For the more traditional losses such as workers' comp and auto personal injury protection. End of life care is becoming more and more costly, and individuals with severe injuries are living longer. These costs rise exponentially, particularly when institutional or 24 hour care is needed.

We're also seeing a new emergence of some known losses. For instance, sexual molestation. Currently, more than two thirds of the states have passed revival statutes that either eliminate the statute of lamentations or extend them, allowing people to make claims decades after the alleged abuse occurred. For some institutions and organizations, these claims can expose both current claims made coverage as well as older occurrence space cover, from when the abuse was alleged to have occurred.

Also, the losses known as APH or legacy liabilities like environmental continue to develop, as older claims, especially multi-party lawsuits and coverage actions continue to be resolved decades after the litigation was filed. In particular, reinsurance contracts from the 1970s have been seeing some recent significant development. In addition, the EPA is now setting new standards of contamination, lowering the amount per trillion of certain pollutants, such as forever chemicals like PFAS that is allowable before the cleanup of property and drinking water is required. In regard to asbestos, it's coming back again. Initially we saw products losses against manufacturers, then operations claims against installers and others were presented. Recently, allegations against talc manufacturers are alleging that their product is contaminated with asbestos and allegedly causes cancer in something that we see more and more.

Marcus Winter:

What does that mean on the underwriting side for you, Maura?

Maura Freiwald:

Leah's comments are right on point and these older losses that are still developing have forced the industry to evolve. It's very important to continue to understand the underlying exposures of our clients' portfolios and utilize the right exclusions to prevent similar losses from happening again. For environmental claims, it was the introduction of the pollution exclusion in the '80s, which clarified that GL policies never intended to cover gradual pollution. For asbestos exposed business, it was the introduction of the asbestos exclusion. And for some losses, sub limiting or excluding the exposure or defining that coverage applies on a per aggressor and not on a per claimant also made a difference.

Recently, we've been spending a lot of time on PFAS, understanding the exposures, the accumulations and underwriting to best effectuate the intended purpose. In addition of these long-tail claims, the emergence seen starting in 2022, which is something we're all talking about is what we had anticipated. Some of the emergence can be explained due to the backlog in the court systems clearing up after the COVID shutdowns. But it also confirms Munich RE's previously perspective on liability and why we took the underwriting and reserving actions we have been taking since 2018. Liability has always been considered a long-tail line of business, but in some cases, that tail is much longer than originally thought.

Marcus Winter:

Leah, on the claims side, it must be very difficult to quantify the extent of these emerging long-tail claims.

Leah Spivey:

Fortunately, due to the vast experience of our claims staff and appropriate reserving philosophy, we have a very good track record of estimating emerging risks and staying ahead of the curve on our overall portfolio. However, we cannot always predict every loss. As a matter of fact, we were a bit surprised last year with the 1939 exposure that we ended up having to settle before it went to court.

Another factor regarding these current liabilities, although they may have been presented similarly with formal liabilities, so much has changed in our world that it makes accurate estimating more difficult. For example, the average settlement for sexual misconduct claims that I spoke about earlier historically had been about $250,000. These days, that average settlement is up to $1 million per claimant. This is not surprising given the outrage against certain institutions surrounding these matters.

Marcus Winter:

Unfortunately, in addition to the single claims reserves within also reserve at a portfolio level, but it must be difficult Maura to really incorporate that also on the pricing side and come up with the right pricing for our casualty business.

Maura Freiwald:

Indeed Marcus, in pricing, as in history, the past has been the best predictor of the future. Unfortunately, in the current environment, like Leah alluded, the current environment we live in is one that we have never seen before. The rise of legal system abuse like reptilian theory, lawyer advertising and litigation funding makes it very difficult to predict the future liabilities based on past experience. Therefore, more detailed data on current exposures and past liabilities, including but not limited to viewing prior data through a new inflationary lens are essential in helping to accurately determine the necessity of rate increases for this known unknown long-tail claims. Transparency between reinsurance partners is essential to stay ahead of trend, respond to surprises we know will come and set adequate prices to maintain the security that all parties desire.

Marcus Winter:

So what can the insurance industry do to help deal with this issue?

Maura Freiwald:

Marcus, Munich RE believes that acting responsibly today will ensure a resilience tomorrow. We have utilized our expert resources to constantly monitor our portfolios and new developments. During Q2 investor calls, many companies touched upon the topic of prior year loss development and new claim emergence. We compared received submissions from the first half of 2022 to those same accounts in the first half of 2023 to understand the emergence. Our analysis show that on average, the total incurred year over year went up by 31%. This is a significant increase and in line with our prior expectations driven by new losses and development of existing losses.

This analysis highlighted the fact that emergence is not just for the latest years, but in some cases it dates back to 2012. This requires the industry to be more diligent about discussing and understanding what's happening in the underlying portfolios, litigation trends and legislative developments, and it would also put pressure on the upcoming renewals.

Marcus Winter:

And that will be the same I assume on the claims side?

Leah Spivey:

Maura just gave you the story about all the numbers. I'm going to talk about the people. I think we really need to continue to invest in people to maintain the current high level of expertise and keep pace in this ever-changing world. Fortunately, we have experienced professionals in the industry who have seen much of what is now being reinvented, but we need to do a better job in attracting new talent, who can continue to lead us into the future in a responsible manner.

Again, emerging risks continue to occur at a rapid rate with new technology, e-commerce and new ways of working and living develop, so do new risks. And some that we haven't even begun to imagine. Tomorrow, those risks will give rise to losses that will impact the policies we're writing today. Although we cannot predict the next big thing, we can be sure there will be one. It may very well be the last little thing in a new way.

Marcus Winter:

Leah, some of the corporations out there seem to try to use bankruptcy regulations, bankruptcy laws to avoid some of the old long-tail claims. What is your take on that?

Leah Spivey:

Marcus, as you're referring to, are there many large institutions like the Boy Scouts and for-profit companies that have tried to use the US bankruptcy laws to deal with long-tail liabilities. Some like J&J have attempted to do so while continuing to run ongoing operations by splitting into a good company and a bad company. All of the liabilities, therefore, it can be managed through one single bankruptcy process instead of hundreds or thousands of individual lawsuits. Although J&J's recent effort toward bankruptcy for their tens of thousands of talc lawsuits has been temporarily blocked from proceeding in two decisions.

Despite the apparent efficiency through bankruptcy, the trade-off is that there is often no day in court for the opt-in plaintiffs to present their cases, nor can insurance carriers argue coverage or damages issues, as these assets are called upon to fund the distribution plans. Instead, most parties involved just make the best deal they can.

Marcus Winter:

Colleagues, thank you very much for sharing your insights. Here's my last question that I ask all my guests. If you had a magic wand, what would you change about how we as an industry deal with long-tail risk?

Leah Spivey:

I can go first. I would love to see the insurance and reinsurance companies better prepare for long-tail claims as an ongoing reality rather than a surprise. Casualty business underwritten with traditional occurrence policies will always give rise to future liability exposure. Companies like Munich RE US are and have always been aware of that reality and have acted responsibly by planning through our sound pricing and reserving practices and our forward-looking investment in expert claims professionals who are able to manage these long-tail claims and provide our seating company partners with the insight and security they deserve.

Marcus Winter:

And what would your magic do, Maura?

Maura Freiwald:

I would like to see adequate rates, terms and critical tort reform. We need to further address the legal system abuse and the various aspects of litigation funding. Right now, we can only do it with underwriting discipline, proactive claims handling and limit management. But only transparency with regards to third party litigation and ring-fencing the plaintiff's bar will address all the unpredictability we're currently facing.

Marcus Winter:

Maura, Leah, I like those ideas. Thank you very much again for joining me today.

Maura Freiwald:

Thank you for having us.

Leah Spivey:

No problem. Anytime.

Marcus Winter:

It obviously is very important to discuss. While we cannot predict that next big thing in long-term claims, what the actions are to help to mitigate the effect of these claims. We must always be aware that the claims environment can change as reinsured is critical, we act responsibly today to ensure a resilient tomorrow. We must continue to price casualty risks adequately, share our expertise with our clients and continue to monitor emerging casualty risks. Stay tuned for our next episode of Nothing Assumed. Bye for now, [foreign language 00:12:57].

Speaker 4:

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