September 2010
Systemic Exposures in the Casualty Market
…and how to address them
Grange Turner, Guy Carpenter & Company Ltd, London
Contact: +44 207 357 1424 grange.turner@guycarp.com
Insurance Practitioners Association Conference – Istanbul September 2010
www.guycarp.com
Agenda
1.
Definitions of event and systemic exposures
2.
Examples of clash and systemic exposures
3.
Past clash and systemic losses
4.
Systemic exposures in a recessionary environment
5.
Modelling clash and systemic exposures
6.
Methods of protecting against clash and systemic exposures
Guy Carpenter
1
1. Definitions of Event and Systemic exposures
What do we mean by “clash”, “event” and “systemic”?
 Clash – a single loss, or series of losses, deriving from more than one
original policy
 Event – a loss scenario, usually definable in time and place, which
may involve multiple policies
 Systemic – exposures derived from a broad industry wide practice, or
from a general social or economic trend
Note – these are working descriptions of the terms, not legal definitions.
Guy Carpenter
2
2. Examples of Clash and Systemic Exposures
What do we mean by an “event”?
Event exposure to different classes of casualty business
 General Liability – multiple producers involved in the same faulty
product or project
 Employers Liability – workers for multiple insureds injured / killed in
the same explosion
 Motor – multiple vehicles involved in the same accident/Catastrophe
 Professional / Financial lines – multiple advisers involved in the
same financial collapse (bankruptcy)
Events are generally specific in time and place
Guy Carpenter
3
2. Examples of Clash and Systemic Exposures
What do we mean by an “Systemic”?
Systemic exposures to different classes of casualty
business
 General Liability – a similarly faulty manufacturing process leads to
numerous similar losses
 Employers Liability – a business practice common to a sector leads
to a number of similar injury / disease claims
 Motor – an increase in the number of accidents caused by unusual
weather patterns
 Professional / Financial lines – professional advisers from a number
of firms following a similar pattern of practice
Systemic exposures generally have broader scope than events
Guy Carpenter
4
2. Examples of Clash and Systemic Exposures
Event Categories
Natural Catastrophes
 Earthquake
 Hurricane
 Virus outbreak
Man-made failures
 Terrorist Attack
 Corporate collapse
 Infrastructure/ Project failure
 Major identity theft
Business practices
Economic malaise
 Tax shelters
 Late Trading in US Mutual Funds
 Contingent Commission practices
 Product widely mis-sold
 Increase in corporate dissatisfaction
 House price slump
 ‘Credit Crunch’ / Recession
Guy Carpenter
5
3. Past Clash & Systemic Losses
A historical perspective…..
 Asbestos – multiple claimants from multiple firms for disease related claims
spread over many years
 Enron – US corporate collapse which drew in multiple advisers, and other
firms with a business link
 World Trade Centre – terrorist attack resulting in numerous deaths and
injuries (WCA claims) and suits against various professional advisers
 Pension opt-outs – multiple investors were wrongly advised to leave their
corporate pension schemes
 Sub–Prime – numerous failed investment products derived from sub-prime
lending practices in the US
 Wembley Stadium – architects and building companies involved in late-
running construction project
Wide range of original types of loss…..
Guy Carpenter
6
4. Systemic Exposures in a Recessionary Environment
Effects of a recessionary environment on different
classes of casualty business
 General Liability
– Lack of investment in new plant / equipment
– Reductions in the number of suppliers
– Reduction in number of workers
 Employers Liability
Recession brings
increased tendency
to litigation and
fraudulent claims
– Cut-backs in a firm’s safety schedule
– Fewer workers doing same workload
– Lack of investment in new plant / equipment
Events are generally specific in time and place
Guy Carpenter
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4. Systemic Exposures in a Recessionary Environment
Effects of a recessionary environment on different
classes of casualty business
 Motor
– Injured parties making claims where previously would not have
done;
– Staged accidents
– Increased number of fraudulent claims
 Professional / Financial lines
– Increased tendency to sue professional advisers in event of
investment/business failure
– Collapsing property values lead to increased claims against valuers
Guy Carpenter
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4. Systemic Exposures in a Recessionary Environment
Other factors affecting systemic casualty exposures in the long term
 Long-tail characteristics
 Potential for changes in legal environment
 Potential for changes in policy interpretation
 Political/regulatory intervention
How many Casualty Cat losses could have been predicted without hindsight?
Guy Carpenter
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5. Modelling Clash and Systemic Exposures
Guy Carpenter’s approach to modelling Casualty Clash involves the
following;
1. Portfolio Exposure Analysis
 Provide a catastrophe profile of your Casualty / Liability portfolio
 Identify:
– Which portfolio segments are most accumulative; facilitate price loading
– Data capture that’s essential in casualty accumulation reporting
– How casualty catastrophe losses could impact your portfolio
Guy Carpenter
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5. Modelling Clash and Systemic Exposures
2. Realistic Disaster Scenarios
 Customise a classic/systemic cat event set using a uniform network-
based system
 For each scenario, stochastically model the business relationship links
– allowing for type of jurisdiction
– providing a distribution of possible outcomes
 Demonstrate to stakeholders / regulators that you have a transparent
identification process of allocating risk capital to defined long-tail
disaster scenarios
– a vital part of ERM tool for Solvency II
Guy Carpenter
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5. Modelling Clash and Systemic Exposures
Example of Business Relationship Links
Case Study: Chemical/Industrial Gas Manufacturer
 Supply of goods and services to
chemical / industrial gas mfg.
– All links included
– Wide range of industry groups
 Large hub and spoke arrangement
– Centered industrial gas mfg.
(325120), as expected
 With two areas of interlinking
– One group centered on primary
and fabricated metal product mfg.
– The other around construction,
architects & engineers and
machinery mfg.
Guy Carpenter
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6. Protecting Against Clash and Systemic Exposures
Reinsurance Options
Whole Account
Available Coverage
Single Insured
Mono-Line
Multiple losses
on an ‘Any One
Claim’ form
More than 1
insured
Same coverage
Standard
Systemic
Non-Systemic
Several
Ins’ds/policies
Single event/
series loss
Multi Ins’ds/
Coverages
Event = similar
behaviour
Multiple Sectors
Broad Form
Systemic
Sole Judge
Systemic
Even broader
basis of
accumulation
Reinsured is
sole judge of
event
Less
Difficulty of defining ‘Event’
More
More
Reinsurance capacity
Less
Light
Pricing
Guy Carpenter
Heavy
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