Mass litigation and long-tail risks are driving the “emerging casualty catastrophe market,” which is projected to generate an estimated US$5bn in annual reinsurance premiums, according to an executive insight report by Aon and Moody’s published in September.
Amanda Lyons, global product leader at Aon’s Reinsurance Solutions, stated that the market has “reached an inflection point,” stressing the need for (re)insurers and other capital providers to address rapidly emerging risks.
The structural shift in the casualty sector is fueled by the rise of litigation finance and complex plaintiff-generation practices, reflected in the two to three new mass litigation cases annually in the US from 2014 to 2022.
These involve issues like per- and polyfluoroalkyl substances or PFAS contamination, addictive software designs including social media platforms, microplastics, ultra-processed foods, and environmental-related claims that “threaten the stability of insurers’ reserves and challenge traditional actuarial models.”
The novelty of their legal arguments and scientific evidence has increased the likelihood of litigation, according to Aon and Moody’s, resulting in higher latency in casualty catastrophes relative to attritional claims.
“The effect on a portfolio is that when exposure to emerging risks increases, reserves based on historical claims can underestimate the reserve duration and increase the need for reserve restatements,” the report noted, adding that decreases can also lead to over-reserving.
In addition to the cyclical reserving crises, Aon and Moody’s highlighted that multiple companies and casualty insurance lines may face simultaneous impacts from a single mass tort litigation event. This makes it difficult for insurers to “maintain predictable financial outcomes.”
To address these hurdles, the firms pointed out several opportunities for the sector. One key proposal is the use of advanced analytics and AI-enabled casualty catastrophe modelling to help (re)insurers “simulate future scenarios, price risk, and manage long-tail liabilities.”
Another solution is the creation of a named peril casualty reinsurance, which provides explicit coverage for emerging pre-litigation threats. According to the report, this approach aims to mobilise capital, improve capital efficiency, and simplify risk aggregation management.
This platform further allows insurers to implement latency reserving, which entails assigning specific reserves for named peril exposures and dividing incurred-but-not-reported reserves into “conventional” and “latency” buckets.
Along with these initiatives, the market is also poised for significant growth through legacy liability transfers and parametric structures. As such, the report added that “(re)insurers that strategically leverage data, analytics, and innovative risk-transfer mechanisms will be best positioned to assess such emerging risk and capitalise on the rise in demand for liability coverage.”
