Don't Let the Tail Wag the Dog - Risk Strategies for European Commercial Liability Insurance
Change is happening right across the liability risk landscape in Europe. New types of risk are constantly emerging and claims complexity is increasing. Thanks to the media's focus on blame, the public is more willing than ever to file claims. Meanwhile, legislators are reacting by introducing stricter liability regimes with new liability provisions.
Because current claims data was generated in a completely different environment, insurers are faced with the difficult task of evaluating future loss potential without being able to extrapolate historical data. This poses a real problem in commercial insurance and particularly for industrial liability insurance business.
Long-tail personal injury claims can take several decades to settle and are key contributors to uncertainty. Incorrect evaluations that are based on incomplete loss information, or false assumptions about inflation, have an enormous impact on final loss figures and can lead to unexpectedly severe financial losses for the insurer. For example, consider the long latencies of certain potentially hazardous substances before health problems become apparent.
Liability insurance is essential to the smooth running of the economy and it is necessary to have insurance cover which insurers are in fact happy to provide – it is their business! But how can long-tail business be run sustainably and successfully in today's uncertain environment?
The key to achieving reliable and safe insurance coverage lies in combining realistic risk assessment with rigorous product design. This involves:
- Risk management based on a (re)insurer’s independent risk research and monitoring
- Identifying and controlling accumulations by the insurer and reinsurer
- Risk-appropriate policy terms independent of underwriting cycles
- Pricing reflective of unknown or still evolving exposures
- Risk-based limit management
- Conservative assumptions when assessing and reserving claims
- Ensuring policy holders continue to prioritize own risk reduction, despite having insurance in place
Finally, remember that insurers can also manage their risks through risk transfer, and in this respect reinsurance is the simplest, best and most cost-effective means. Reinsurance is a building block that significantly contributes to keeping even the newest forms of risk in liability insurance under control.
It goes without saying that it’s always worth checking the financial strength of reinsurance partners as the alliance has to live for decades, but a reinsurer’s underwriting expertise and a long-term commitment to its business model are also essential for safe risk transfer in the long term.