As liability insurers respond to COVID-19 with increasing numbers of exclusions, they risk creating dissatisfied customers who feel they are being sold products with little use or relevance.
The solution, according to Bob Reville, chief executive officer of emerging risk specialist Praedicat, is for insurers to price and cover named perils rather than to take the “all perils with exclusions” approach.
Praedicat provides a range of analytics and models designed to help liability insurers to write risk differently—without so many exclusions.
“Liability insurance is written to cover all perils, but all policies have exclusions,” said Reville.
“As an industry we are quick to exclude perils that are difficult to underwrite.”
Instead, Reville said, the industry doesn’t seem to be taking the time to drill down into the components of the peril or innovating in a way that can cover the emerging risk.
The current rush to COVID-19 exclusions is driven by uncertainty about the full impact of pandemic, but Praedicat has launched a COVID-19 Litigation Tracker which it believes will allow liability insurers to monitor litigation as it happens.
So far, it suggests the impact of the pandemic on the liability sector may be minimal.
“It’s relatively early days but we have counted a little over 300 complaints in our Litigation Tracker, which is manageable,” said Reville.
“For instance, there are 15 to 20 D&O claims that count as COVID-19-related; that is not insignificant but is not on the scale of the financial crisis of 2008.”
In the tracker, Praedicat is keenly watching the emergence of “take-home COVID-19” cases: cases that are filed against employers for family members of essential workers who have become ill or died as a result of the essential worker getting sick at work.
“We are particularly focused on take-home liability because it has the potential to have the largest industrial footprint, from retail to meat-packing to healthcare,” said Reville.
Praedicat’s Litigation Tracker is proving its worth amid the COVID-19 pandemic and is set to track a wider range of litigation types in the future.
“It addresses a problem the industry has, which is that insurers see only the claims against them. They have no way of knowing about an emerging cluster of claims unless they have received a claim themselves,” said Reville.
“To have a more universal understanding of emerging claims is very exciting. So far, the industry has been very eager to get its hands on the tracker which has been encouraging us to expand into other emerging risks, which we are going to do.”
“To have a more universal understanding of emerging claims is very exciting.”
Meanwhile, Praedicat continues to monitor roughly 250 potential risk “candidates” that might prove to be the “next asbestos”, ranging from cellphones to nanomaterials to fracking.
In this area too, Reville emphasises that the industry response should not be more exclusions, but a more disciplined approach to underwriting.
He believes the wisest approach to this type of risk, rather than pursuing exclusions (and making policies less appealing to buyers) is to adopt a strategy of “occurrence exclusion, named peril write-back”: the occurrence exclusion eliminates the problem of historical coverage, while the named peril write-back keeps the policy useful during its timeframe.
“This means you keep the policy relevant to the buyers—you don’t just exclude it, you manage your total exposure,” Reville explained.
“With this approach the industry could get to the point where it knows exactly how much coverage it is putting out for all these emerging risks.
“It will also help clients solve the problem of not knowing whether they will be sued in the future over past underwriting of some newly emerging risk.
“They will not have to put industry capital at so much risk, and reinsurance plays an absolutely central role in this whole process as well,” he said.
For example, one emerging area of litigation—PFAS (perfluoroalkyl and polyfluoroalkyl substances)—relates to bodily damage linked to the presence of these chemicals in everything from food packaging to water supplies.
PFAS are known as “forever chemicals” because they don’t degrade in the environment and stay around forever. As a result litigation may emerge 10 or 20 years after an exposure, meaning that a lot of historical coverage could be at risk.
Had the occurrence exclusion, named peril write-back approach been followed for PFAS 20 years ago, Reville said, insurers would know exactly how much exposure they have today and be sure they could manage it.
There would be no need for the complete exclusions in recent years during the period when the potential for large scale litigation remains unclear.
“It’s all about how you keep the product useful and relevant to the buyers,” he said.
Praedicat will be working with its clients over the coming year to help them manage their risks across multiple lines of insurance, assisting them with the development of new named peril insurance products and expanding its modelling beyond general liability to include D&O, workers’ comp and environmental liability.
The company is on track to become not just a liability insurance modelling company but also a full-service casualty insurance modelling company, and in line with this, will be launching new product extensions over the coming year.
“I see a lot of opportunity in the current environment because some of the issues in the way the industry manages risk have been exposed by social inflation and COVID-19.
“The demand for ways to make sure they manage it better in the future is high,” Reville concluded.
Main image: shutterstock.com / Simon Annable