Technical Center
Casualty Actuarial Society Spring Meeting
Hot Claims Topics (C10):
Casualty as a Catastrophe Impacted Line
Jason Schupp, Director of Regulatory Policy & Programs
Technical Center
June, 2007
Overview of Casualty as Catastrophe Line
•
Workers' Compensation
- Earthquake
- Managing the terrorism exposure
- Terrorism insurance market
•
Liability
- Liability catastrophe related loss history
- Legislation limiting terrorism liability exposure
- TRIA litigation management, approval and reporting requirements
© Zurich American Insurance Company 2007
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workers' Compensation and Catastrophes
Actual Events
• Recent earthquake history has produced minimal workers' compensation
losses due to the time of day of the events
- Northridge (1994) @ 4:31 am
- Loma Prieta (1989) @ 5:05 pm
• Terrorism has produced significant workers' compensation losses:
- Approximately $2 billion related to the WTC event (2001)
- Minimal from Oklahoma City because most were federal employees
Modeled Workers' Compensation Loss Events
• 1906 San Francisco Earthquake: $11.5 billion - $35.8 billion (RMS)
• 6T truck bomb in NYC: $3.5 billion (AIR)
• 6T truck bomb in Des Moines: $1.5 billion (AIR)
© Zurich American Insurance Company 2007
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Managing the Terrorism Clash Exposure
Multi-line insurers manage central business district workers' compensation
exposure to terrorism in conjunction with property insurance exposures
Most insurers manage terrorism
accumulations by modeling a
5 or 6 ton truck bomb (roughly
the size of a Ryder Truck van
filled with diesel fuel and fertilizer)
Insurer will manage “total maximum
loss” from this assumed event as
to not exceed a threshold amount
Red dot indicates site of
truck bomb detonation
In this way, workers' compensation and property insurance compete for capacity
© Zurich American Insurance Company 2007
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The Terrorism Market is Driven By Non-Terrorism Business
Once an insurers has reached
its terrorism exposure threshold,
the insurer cannot take on
additional business without
reinsurance or access to the
federal back-stop
Once an insurer “maxes out”
on terrorism exposures in a
region, it also stops writing
non-terrorism exposures
associated with property
and workers' compensation
risks
The average workers'
compensation terrorism
premium is 1.5% of the
total policy premium – so
that writing terrorism
coverage is the cost of
writing the other 98% of the
policy
Because terrorism and nonterrorism exposures are
linked, failure of the terrorism
market implies failure of the
non-terrorism market as well
WC structure offers few tools
for insurers:
• No exclusions
• No limitations
• No fault benefit
Because TRIA has linked terrorism and non-terrorism coverages, insurers are willing to
assume terrorism exposure at a loss in order to secure profitable non-terrorism business
© Zurich American Insurance Company 2007
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Liability and Catastrophes
•
Sept. 11 estimates:
•
In re 9/11 Litigation, 280 F. Supp. 2d 279 (Consolidated Tort Liability Cases):
- American Airlines
- United Airlines
- Port Authority of New York
- Port Authority of New Jersey
- WTC Properties, LLC
- Boeing (manufactured 757 jets)
- City of New York (Rescue personnel suing from ailments stemming
from debris and smoke at Ground Zero and Fresh Kills Landfill)
•
After initial filings of class actions against oil companies and others as well as
isolated insurance agent lawsuits, the 2005 hurricane season has produced
modest liability insurance claim activity to date
•
Most published actuarial analysis sets catastrophe related liability losses as
10-20% of modeled property plus workers' compensation loss
© Zurich American Insurance Company 2007
$4 billion of non-aviation loss
$3.5 billion of aviation liability loss
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Legislation Limiting Terrorism Liability
Air Transportation Safety and System Stabilization Act of 2001: Enacted after 9/11
to limit airline liability and to afford an optional compensation mechanism for those
injured or killed in the 9/11 attacks (through the Victim’s Compensation Fund)
• Airlines were protected from excess liability
• VCF designed to limit tort litigation and afford no-fault benefits to individuals
• VCF participants waive right to sue airlines, government agencies or others
• Less than 2% of eligible families opted not to use the VCF
Aviation Security Act: Amended the ATSSSA and limited the liability on air carriers,
aircraft manufacturers, airport sponsor or persons with any property interest in the WTC
to the amount of liability insurance coverage.
Safety Act (Nov. 2002): affords protection and limits liability of sellers and others in the
supply chain with goal to encourage businesses to develop and market new antiterrorism technologies
• Prohibits punitive damages and limits liability for non-economic damage
• Federal jurisdiction over lawsuits and caps liability to insurance
© Zurich American Insurance Company 2007
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TRIA Litigation Management & Claims Reporting
Litigation Management
• Creates Federal cause of action for certified acts of
terrorism (preempts all state causes of action)
• Treasury requires prior approval for third-party
settlements that involve losses that may be part of a
claim for reimbursement under the back-stop for:
(1) personal injury or death claims
greater than $2 million; or
(2) property damage claims greater than
$10 million
• To obtain approval, insurers must provide written
notice meeting twelve requirements, which include:
- A statement of policy terms and coverage
defenses coupled with an admission of liability
under the policy (which appears to ignore that
insurers settle disputed coverage claims)
- A statement of the insurer or its attorney
supporting the settlement (which appears to
require the insurer to justify the claimant’s
disputed claims)
- The intended use by the claimant of
settlement proceeds with regard to payment of
its attorneys and other expenses (information
likely unavailable to the insurer)
(source: 31 CFR 50.83(d)(1)-(12))
• ALAE is part of “insured losses”, although underlying
punitive damages and insurer extra-contractual are not
© Zurich American Insurance Company 2007
Claims Reporting Requirements
• Initial Reporting:
- Insurer must file notice within a Program Year if
losses expected to exceed 50% of deductible
- Initial Report must include:
 Estimated incurred aggregated insured losses
 Estimated insurer deductible
 Estimated federal share of compensation
 Contact information
• Initial Certification: Bordereau format – required within 45
days after the last day of the month once an insurer paid an
amount that exceeded its deductible:
-
Cat code
Line of business of policy by NAIC line
Location of loss
Date of loss
Insurer NAIC number
Claim number
Insured name
Effective and expiration date of policy
Loss payment (current and historical)
ALAE paid
Punitive damages paid
Salvage and subrogation recoveries
Reinsurance recoverable
Other federal benefit information
Claim status
Reserves
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Questions / Discussion
© Zurich American Insurance Company 2007
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