Rating Agencies Getting More Interested in Emerging Issues
Emerging Issues that can impact the Property/Casualty insurance industry can arise from a variety of circumstances including:
- Scientific, technological and medical advances
- Judicial decisions abrogating policy coverage defenses
- New and/or amended laws and regulations
- Changes in societal trends
About a year ago Fitch Ratings estimated that the Property/Casualty industry reserves were deficient by up to $5 billion. They explained that, while their estimate for the deficit was “unscientific,” it was “based on the belief that the industry does not fare well in its ability to predict new major latent loss exposures - making it likely that prior underwriting years will develop unfavorably.”1
We have known for a while now that A.M. Best had added a few questions about the tracking and management of emerging issues to their enterprise risk management (ERM) audit questionnaire.
We just recently learned that Standard and Poors (S&P) has begun asking questions about emerging issues as part of their ERM audit. These questions include:
- What are the top 5 emerging risks currently being considered by your company?
- What are some examples of emerging risks that you have successfully addressed?
- How do you use scenario analysis to tackle Emerging risk management?
- What are your top 3 sources for tracking emerging risk?
The interest in emerging issues shown by the rating agencies should not come as a surprise given that previous emerging issues (e.g., asbestos, pollution, lead poisoning, mold) have cost property/casualty insurers tens of billions of dollars in defense and indemnity payments.
The attention provided by these ERM questions comes at a time when there is no shortage of emerging issues facing both Commercial Lines and Personal Lines carriers. Issues include:
- Cyber attacks that can cause actual physical damage to equipment, machinery and facilities
- Assisted driving innovations (well before the driverless vehicles hit the market)
- Substances once deemed safe that have been in use for decades and are now deemed harmful (e.g., diacetyl, BPA)
- Personal Injury claims arising from internet defamation
- 3D Printing
- The internet of things
And this list only begins to scratch the surface.
As scientific, technological and medical advancements arrive at a seemingly ever faster pace, insurers are dealing with new and/or changing exposures that may not have been contemplated in the underwriting or pricing of the risk.
1. Seven Straight Years of Reserve Releases: Fitch, Carrier Management, 8/20/13.