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07 Apr 16 13:51

Few products in re/insurance are as challenging to model as liability due to its long-tail nature and its susceptibility to changing technological, economic, legal and societal conditions. In addition, we do not have a good understanding of the exposure of a liability portfolio towards risk accumulation.

What is the next asbestos? When will it happen and how big will it be? How exposed are portfolios? These questions are becoming more and more relevant in an increasingly globalized world and where the development of new technologies is speeding up. When I first started working in Casualty years ago, I thought that we'd need something analogue to what is already in place for natural catastrophe risk management. An approach aiming at the better understanding of the cause-effect chain of a liability event, from the loss generating process via all the economic, societal, legal, and judicial drivers, to the final insurance coverage.

A team at Swiss Re developed a unique forward-looking modeling (FLM) approach to address these needs. Swiss Re's Liability Risk Drivers™ (LRD) model starts from loss scenarios and risk drivers, and models the cause-effect chain, using historic payouts to challenge model predictions, i.e. to check if the model was able to predict the past without directly using it.

Forwarding-looking modeling allows us to anticipate the impact of a change or of a trend (such as new class action laws or medical cost inflation) without having to wait for claims to emerge. Re/insurers can use it to confidently grow their business in new markets and segments where we may lack sufficient loss experience such as high-growth markets. FLM gives re/insurers a better understanding of how a portfolio is exposed to big liability events.

Do you also have FLM approaches in place? Do you see other areas of application of FLM? It would be great if you could share them as comments below.


Category: Other


5 Comments

Andrea Scascighini - 9 Apr 2016, 3:42 a.m.

New product development seems an area where forward looking models can play a decisive role. The ability to decompose the cause-effect chain in a structured way allows to experiment with variations of the risk factors to see their impact on the product. I imagine that one could change a factor like the existence or not of a strong risk management culture to calculate the corresponding discount for the better risk. Or for example model the impact of moving from an *occurrence" cover to a "each and every claim" coverage.

Seems to me that the opportunities to change the product landscape are huge.

Filippo Salghetti-Drioli - 9 Apr 2016, 6:20 a.m.

Thank you for your comment. In LRD we indeed have a module responsible to assess "internal" risk factors, i.e. related to risk measures in place, or - as you say - risk management culture, etc. In this area the underwriter's knowledge of the specific risk is key. From a portfolio perspective, even more interesting is that we have an overall "loss prevention" risk driver defined at a country level, accounting for the overall country (societal, cultural, legislative) situation. Here you can factor in trends and developments (or simulate them) and see the impact on the portfolio down to the single industrial activity level.
You also mention wording elements for changing the product landscape and you're absolutely right. We have a wording module in LRD, allowing exactly to evaluate the impact of such changes. Some wording elements are already modeled (e.g. claims made vs. occurrence), more could be added!

Andrea Scascighini - 14 Apr 2016, 5:43 p.m.

I posted some ideas on how to change the casualty insurance products fromall risk to named perils thanks for forward looking models. Follow this link if you are interested in exploring this
https://openminds.swissre.com/stories/1014/

Philippe Maeder - 21 Apr 2016, 10:06 a.m.

You mentioned asbestos, the "next one" could also impact accident insurance in Switzerland (as defined by UVG law) as it also covers professional sicknesses and asbestos had and still has a large impact on claims for certain economic classes (construction is one of them, of course)

Philippe Maeder - 21 Apr 2016, 10:10 a.m.

In Life and health, we also offer pandemic risk covers (stop-loss) and I wonder whether your model would come close to the present used models


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