Emerging risks set to drive liability claims growth, Swiss Re says

Demand for liability insurance is set to increase and new risks and stronger economic growth will also lead to an increase in claims severity, according to a new sigma report from Swiss Re.

Depsite low liability pricing, liability claims have been lower-than-expected since 2008, allowing insurers to increase their profitability, according to Swiss Re. Low inflation, low wage growth and improvements in medical care costs have all contributed to lower claims costs, according to the report.

“Tort reform has dampened claims severity in some markets, but the effects were a one-off benefit and will no longer suppress claims growth to the same degree,” Swiss Re said.

With new risks, such as cyber risk and liabilities arising from emerging technology such as hydrofracking and self-driving vehicles, liability claims are likely to increase in the near future, the report suggests.

“With global ever-increasing interconnectivity – via cyber links and supply chains – the risk of casualty catastrophes is rising,” Jayne Plunkett, Swiss Re’s head of casualty also noted in a company statement.

Eroding claims reserves may also hinder insurers’ profitability as claims grow, according to Swiss Re.

“Liability risks are challenging to underwrite and price due to their long-tail nature, which often results in claims being settled many years after business is written,” it noted.

“Insurers need to take advantage of their underwriting expertise to improve pricing. Likewise, they must maintain capital strength to manage the long-tail nature of the business and the rising claims costs, such as those from the growing litigation funding industry.”

Swiss Re also recommends insurers innovate and use predictive analysis to better understand risk drivers.

“Insurers today have more data available than ever before,” Thomas Holzheu, one of the authors of the report commented in the statement from Swiss Re.

“They can use this to better understand complex relationships between observable risk drivers of claims frequency and severity, and to maintain underwriting quality.”