Accumulation risk, where a single event triggers losses under multiple policies in one or more lines of insurance, is an established phenomenon in the insurance industry. It lurks in the portfolio of every insurer, whether small, large or global. But now, more than ever, accumulation can manifest itself in new and unforeseen ways.
The PRA acknowledges that there are limitations in specifying liability catastrophe scenarios. Their General Insurance Stress Test 2017 (GIST 2017) shares the understanding there are difficulties 'in defining a market-wide liability stress test that appropriately tests industry resilience to liability shock-events'. Therefore, further attempts to develop future market-wide liability stress tests are essential.
When property losses becomes a liability accumulation problem
Accumulation scenarios have always been familiar in property insurance but for casualty lines of business, they have been perhaps less of an issue. However, large losses in recent years show how traditional physical perils should not be underestimated for their casualty clash potential. For example, Kilmore East-Kinglake bushfire, the most severe of a series of deadly wildfires that swept through the Australian state of Victoria on Black Saturday, 7th February2009, led to the biggest class action settlement in Australian legal history. A Royal Commission found that the fire was caused by poorly maintained power lines owned by power company SP AusNet and maintained by asset manager Utility Services Group. However, the Victoria State government was also held to be liable for its failure to provide sufficient prevention measures prior to, and inadequate warnings during, the fires. Settlement was agreed with these defendants at just AUD 500 million. A second class action in respect of the Murrindindi fire resulted in a settlement of AUD 300 million. With improved technology and scientific tools available to analyse and simulate scenarios following storms, fires and floods to predict their likely or alternative courses, any action by an individual, corporate body or government now attracts far greater scrutiny. As a result there can be a greater readiness to sue for alleged nuisance or negligence leading to more casualty claims out of natural perils.
Where there is a major accident, many involved parties are implicated and their casualty insurers are involved. Some recent examples include the terminal building collapse at Paris Charles de Gaulle airport (2004), the explosion atthe AZF "La Grande Paroisse" fertiliser plant in Toulouse (2001) and the city archives collapse in Cologne (2009).
The complexity of accumulation risks in casualty insurance is increasing, brought on by business and legal trends. Firms outsource more and more of their value chain, so unravelling responsibilities becomes more difficult. Alternative dispute resolution methods such as mediation and arbitration may not be sufficient leading parties to seek recourse through litigation proceedings, resulting in increased legal costs.
At the same time, investors, rating agencies and regulators all demand stable annual results. The only answer to this is conscientious risk management. Ever more complex solvency rules, too, mean that sound risk management is essential for insurers assessing and controlling risk exposures and accumulation risks.
Grenfell Tower Fire – new claims on the horizon
The Grenfell Tower fire in London is a tragic event where multiple casualty policies are likely to be triggered. The original fire is reported to have started in a fourth floor flat in a refrigerator and it spread rapidly through the outside of the building, causing multiple deaths and severe damage to the 24 storey residential tower block. The building is owned by the local authority, Royal Borough of Kensington & Chelsea Council, and managed by the Kensington & Chelsea Tenants Management Association.
In 2016, Grenfell Tower underwent an £8.7m refurbishment programme. Numerous companies would have been involved in separate elements of the works If the refurbishment is indeed shown to have impacted on the fire safety of the building, such companies, along with the building's owners and managers, could face allegations of negligence. It is thought that there may have been up to 60 firms of contractors and sub-contractors involved in the project. There is also much speculation about the flammability and suitability of the cladding which was attached to the outside of the building as part of the works. As investigations into the cause of the fire and its spread continue, there may be other parties involved. Public liability, product liability, CAR, D&O and professional indemnity policies are all potentially impacted. What is certain is that the resolution of the claims will be a long, complex and expensive process.
Insurance industry needs to look for solutions
Different clash reinsurance solutions are available depending on how an existing reinsurance programme is structured. Confronting this issue head-on and structuring appropriate reinsurance solutions are essential tools to prevent coverage gaps and so meet the requirements of management, investors and regulators. More than ever, insurers will need to look into their reinsurance programmes to see how they would respond to the liability accumulation events. Are the right structures and clash covers in place in the ever changing and interconnected world.
This article was co-authored by Catriona Barker, claims expert UK&International Claims at Swiss Re and Ruta Mikiskaite, Casualty Treaty Underwriter at Swiss Re