AGCS experts examine 10 emerging developments in liability insurance.
1. Large liability claims becoming more expensive
Worldwide, the potential for large liability insurance claims has been increasing. From industrial accidents and pollution events to product recalls and corporate liability, large claims are becoming more expensive, complex and international, with activity increasing outside of the US.
“While we have not necessarily seen an increase in the frequency of large liability claims, those that are filed are typically now more complex and with a higher spend than in the past,” says Larry Crotser, Head of AGCS Chief Claims Office, North America. “This can be seen in the cost of product liability claims, which have been rising, while we now also see a far bigger impact from environmental liability claims,” he adds.
While personal injury claims – such as road traffic accidents, slips and trips and accidents at work – account for the lion’s share of liability claims by frequency, commercial liability claims account for the largest claims by value.
Although recent years have seen a noticeable rise in large environmental liability claims, pharmaceutical and automotive product liability and product defect/recall are the main drivers for large liability claims globally.
The rise of catastrophic and systemic casualty losses
Although rare, large corporate liability cases can be catastrophic in scale, involving multiple jurisdictions, large numbers of claimants and other interested parties.
A 2015 study by insurance broker Aon identified 86 corporate liability losses in excess of $1bn since 1989. Some 57 of these losses were in excess of $2bn and 13 over $10bn, mostly from pollution incidents and regulatory actions1. The largest corporate liability loss in recent times was the 2010 Deepwater Horizon explosion and oil spill which looks set to cost energy company BP a total of $61.6bn2, covering multiple liability settlements with federal and state authorities, shareholders, property owners and consumers.
The emissions testing issues in the automotive industry are an example of just how complex liability losses can become. Allegations of emissions testing cheating have given rise to a number of multi-jurisdictional regulatory investigations and litigation for car maker Volkswagen and its directors. In October 2016, Volkswagen agreed to a $15bn settlement with a group of US federal and state regulators covering some 475,000 vehicle owners in the US. In December 2016, it agreed to a further $1bn settlement to fix or buy back another 80,000 diesel vehicles sold in the US3.
While very large liability losses can impact individual companies, they also can trigger systemic risks that affect many companies within a given sector. The banking sector, and more recently the automotive sector, have both been subject to such large and complex liability events, which have involved huge settlements with regulators, investors and consumers.
Since the financial crisis, breaches of trade sanctions and conduct issues have led to large settlements for financial services companies in the US, while bribery and corruption and cartel allegations have resulted in large financial penalties in Germany. In the UK, the mis-selling of payment protection insurance (PPI) has cost banks over $50bn (£40bn) in compensation payments and regulatory fines as of 20164.
2. Environmental claims increasing
Over the past five years insurers have experienced a significant increase in large environmental liability claims from the mining and construction sectors, in particular from Latin America.
For example, one of the largest losses of 2015 involved the breach of an iron ore tailings dam at the Samarco mine in Bento Rodrigues, Brazil. One of the country’s largest ever environmental disasters, it resulted in 19 deaths, as well as extensive pollution and property damage. More than 700 people were left homeless by the disaster.
Samarco and its owners (the mine is a joint venture between Vale and BHP Billiton) have agreed to settle a $48bn compensation claim from federal prosecutors by June 2017. In addition, the two mining companies reached a settlement with Brazilian authorities of at least $2.6bn to cover clean-up costs and compensation5. While there have been environmental liability losses in Brazil in the past, they have not been of the magnitude of the Bento Rodrigues dam disaster, which was unprecedented in terms of its size and cost, explains Tiago Santos Badin, Claims Manager, AGCS Brazil. “There has been a significant increase in environmental exposure and claims in Brazil as environmental laws have been clarified and as the regulator has become more aggressive,” he says.
Recent years have seen other costly environmental disasters, including personal injury and property damage claims in Australia following bushfires and floods. In Peru, a number of separate oil pipeline spills have polluted rivers in the Amazon basin and affected indigenous communities. Meanwhile, flooding of a construction site in Chile has also generated a multimillion dollar claim. Large environmental claims can be complex, costly and take a long time to settle, whether they are in the US, Europe or emerging markets, according to Crotser. “Large pollution liability claims are now among some of the largest claims that we have seen in the past five years,” he says.
However, Peter Oenning, Global Head of Claims Liability, AGCS, notes that environmental liability claims can be particularly challenging in emerging markets. “They can be complex and difficult to deal with, given cultural differences, language and legal systems that may be less predictable than courts in the US and Europe,” he says.
3. Large industrial claims potential materializing in Latin America
The Bento Rodrigues dam disaster also demonstrates the increasing potential for large industrial liability claims in emerging markets.
For example, in Brazil, economic activity is increasingly concentrated in single locations – such as ports and industrial zones – and with the expansion of national companies into overseas markets. At the same time Brazilian companies are buying more liability insurance. “The potential for large claims in Brazil is growing and we do see large claims getting larger. Exposures are increasing. Today, the insurance market is offering a much greater range of specialist coverages than it has in the past. Liability policies are generally much broader,” says Santos Badin.
The potential for large complex industrial liability losses was also highlighted by the April 2, 2015 fire at a fuel storage terminal at Brazil’s Port of Santos, one of Latin America’s largest transit hubs.
The fire and explosions at the Ultracargo liquid bulk terminal in Alemoa, Brazil, disrupted operations at the nearby Brazil Terminal Portuario and forced several vessels to divert. In addition to material damage, the fire also caused substantial disruption to port facilities and nearby businesses, with loss of access and pollutionrelated losses.
“The fire and explosion at the port, the biggest in Brazil, caused significant damage to third parties, both property damage and business interruption. The incident shows the potential for a large loss in Latin America where multiple third parties are located close together and where multiple policies are triggered,” says Santos Badin.
4. More challenging product liability and recall incident environment
With complex global supply chains and large numbers of products and suppliers being concentrated on a smaller number of larger companies, product liability and recall claims have been becoming larger and more challenging to settle.
For example, US automotive recalls have hit a record high for the past three years in a row, culminating in the recall of around 53.2m vehicles in 20166. The Samsung Galaxy Note 7 smartphone recall has an estimated cost to date of $5bn+ following the battery issues7.
One of the major cases which has dominated the headlines is the massive recall of potentially faulty airbags made by Japanese manufacturer Takata. According to the National Highway Traffic Safety Administration (NHTSA), some 42m vehicles will be affected, impacting 19 automakers to date8. The corporation has agreed to plead guilty to criminal wrongdoing and pay approximately $1bn to resolve a US Justice Department investigation into ruptures of its airbag inflators9.
“Product recalls in the automotive sector are getting bigger with a renewed focus on safety by regulators and with attempts to bring down the number of motor deaths,” says Crotser.
This upwards trend is mirrored across Europe. According to Stericycle Expert Solutions the total number of automotive recall events in 2016 was 415, a jump of 76% over 2015 and the highest total recorded since the European Union’s rapid alert system (RAPEX), which warns about non-food products that pose a risk to health and safety, began. Unsurprisingly, the top country for auto recalls was Germany, given the emissions testing issues experienced in the sector.
Meanwhile, pharmaceutical liability and recalls also continue to generate large claims. For example, the US has seen a rise in claims against pharmaceutical companies over suspected links between talcum powder and ovarian cancer, as well as a potential source of asbestos. In three separate cases during 2016, juries awarded $72m, $55m and $71m respectively to plaintiffs in talcum powder cases tried in Missouri. As of October 2016, there were believed to be around 1,700 similar lawsuits in state and federal courts10.
“Generally the number of recalls has been steadily rising with increased focus on product and workplace safety, as well as more proactive regulation,” says Crotser.
With an increasing proportion of goods now manufactured in Asia, product liability claims have become a significant driver for large liability claims from China. In 2015, China accounted for 2,124 product recall cases in the US, followed by US companies at 68511. China accounted for 62% of the product safety alerts issued by the European Union in 201512.
Food recalls rising
The food and beverage industry is particularly exposed to recalls. In the US recalls rose 12% to 246 during Q4 2016 – the highest since Q1 2010 - with bacterial contamination the major cause. In Europe the number of recalls/ notifications in Q4, 2016 also increased by 12% to 787 – the highest for two years13. Growing supply chains, tightening of safety regulations and faster dissemination of information are all factors in the increasing number of incidents, which can have a devastating impact on a company’s reputation. However, if a recall is professionally managed it can help to minimize damage. Contaminated products insurance can protect businesses against financial losses resulting from the recall of a product following either accidental or malicious contamination
Number of annual vehicle recalls in the US
5. Liability on the rise outside of the US
The US continues to be the world’s largest liability market. It is the country that generates both the highest number of claims, and the largest claims according to value. However, a number of trends have converged in recent years that should see international markets account for an increasing proportion of the global liability market.
Liability claims in the US have stabilized somewhat in recent years, as past tort reforms have helped curtail the more frivolous litigation, with a general trend towards fewer everyday liability claims.
US litigation trends have been fairly consistent in recent years, in terms of frequency and costs, according to data from NERA Economic Consulting. It found that the number of securities class actions and the median settlement values have remained stable over the past five years14, although it noted that during 2016 the pace of securities class action filings was the highest since the aftermath of the 2000 dot-com crash. However, there were also a record number of dismissals, coupled with a settlement rate that remains close to an-time low15. Outside the US, however, liability claims are increasing, particularly in emerging markets, but also in some parts of Europe.
“We do see a trend towards greater liability claims outside the US with increased awareness of consumer rights and compensation in Asia and Europe,” says Oenning. “For example, in Asia, we see far greater awareness among consumers of compensation in China, Singapore and Japan. While in Europe, the highest awards for pain and suffering in Germany a decade ago were around €300,000, now they can be around €500,000 and above,” he adds.
Increases in US legal costs have been largely steady-tomoderate since 2013. But in many countries outside the US, including parts of Europe and Asia, there is a clear trend towards higher legal costs, according to Oenning.
“There is a feeling that non-US liability will become more relevant as the percentage of claims in the US reduces, with increases in the Asia region and other emerging markets,” he says.
China to see growth in cyber and environmental liability claims
Liability claims for specialist insurance, such as cyber risk and environmental liability, are expected to increase in Asia.
“Insurance products like cyber and crisis management will be purchased more and more by Chinese and Hong Kong companies, and therefore we expect to see more claims from these new lines of business in coming years,” says Patsy Wong, Head of Long Tail Claims Hong Kong & Greater China, AGCS. It has been estimated that cyber-crime already costs the Chinese economy around $60bn a year16.
Meanwhile, environmental liabilities are increasing in China with the Chinese insurance regulator and the Ministry of Environmental Protection stepping up plans to introduce compulsory pollution liability insurance, which could cover such risks posed by heavy industry and the metals, textiles and chemical sectors.
“Market education in such new areas of liability are important in Asia. AGCS has launched an environmental liability product in China but the market still lacks awareness of the risk. Increasing the penetration is the next area to work on, while claims experience should help increase further awareness,” says Wong.
6. Global class actions to become more significant
Class actions by consumers and investors remain a largely US affair, but collective redress has taken on a more international dimension in recent years. A growing number of countries now allow for collective action, while foreign companies are increasingly being sued in the US.
Recent years have seen a notable increase in shareholder actions outside the US, including Europe, Australia and Canada. Securities class action exposures in Australia are now second only to those of the US. Brazil, Colombia, Mexico, Argentina, Chile and Venezuela all have some form of collective redress. And while class actions are still very limited in Europe, a number of countries have introduced legislation that allow for some form of collective redress for consumers and investors.
“Legal frameworks that enable forms of collective redress now exist in the Netherlands, Italy and other European countries. On a daily basis this has yet to have the kind of impact seen in the US, but it could become more significant in the future,” says Oenning.
While still in the early days, there have been some notable uses for collective redress in Europe. In March 2016, Dutch bank Fortis agreed to a $1.2bn settlement with investors under Dutch collective settlement procedures. Investors in Volkswagen have also looked to use collective redress legislation in the Netherlands and Germany to bring claims for losses related to emissions testing.
The UK is also seeing investors test legislation that allows for some limited form of collective address. In October 2016, investors in Tesco filed a financial misrepresentation claim against the retailer in the UK.
Meanwhile, the influence of third party litigation funders is changing the global litigation map, with this form of opportunistic funding pivotal in the development of collective actions against financial institutions and commercial entities and their directors and officers. These litigation funders are actively seeking out new jurisdictions and such activity is expected to increase.
What is litigation funding?
Where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed in return for a share of the proceeds.
7. Overseas liability exposures growing for new global giants
Both Latin American and Asian companies increasingly face overseas liability exposures, whether it’s investor-led litigation in the US or product liability claims in North America and Europe.
Directors and officers (D&O) (see below) and product liability incidents are the main drivers behind large liability claims in Asia, where companies are increasingly exposed to more litigious and regulated overseas markets like in the US, Australia and Europe.
For example, an increasing number of Chinese companies have listed on the New York Stock Exchange over the past decade, but this has brought greater regulatory scrutiny and an increased liability exposure. Over the past five years there has been a significant up-tick in the number of Chinese companies caught up in US securities class actions. In 2015, Chinese companies accounted for around half of all class actions involving foreign companies in the US, with many cases focusing on cultural differences around governance and accounting. In particular, securities claims against Chinese companies listed in the US were among the highest severity liability claims. Such claims are typically large and expensive. In 2015, more than 50% of the settlements were under $10m, although a handful of claims have been in excess of $1bn in the past decade, according to AGCS’ Wong.
As with other parts of the world, there have been moves in Asia to make companies and individuals more accountable. Regulators in Hong Kong are now much more likely to carry out an investigation requiring costly defense that might lead to enforcement action and penalties. “For financial lines and D&O we have seen a tendency for claims for regulatory investigations, which are a significant driver for both frequency and severity of claims. This is a trend we expect will continue through 2017,” says Wong.
Meanwhile, Brazilian companies are also increasingly facing the prospect of liabilities overseas. For example, a number of companies face investor class actions in the US, including those for environmental disasters, tax liabilities and bribery and corruption allegations.
In May 2016, investors filed a class action suit in the US against Brazilian steel company Gerdau SA alleging the company issued materially misleading business information filed to investors over tax liabilities. Several Brazilian companies caught up in the Operação Lava Jato (Operation Car Wash) investigation, including state-owned oil company, Petrobras, have also been the subject of US securities class actions17. “As Brazilian companies have become more global we are seeing greater foreign liability exposures and more liability claims from overseas,” says Santos Badin.
Both Brazilian and Chinese companies are now buying more cross border liability insurance programs and are looking to insurers to help manage liability claims across their global operations.
“The increase in international claims is a challenge for Asian companies and their insurers with regards to claims handling. For claims against China, Taiwan or Hong Kong-based companies in the US and Europe we have to leverage our global network and increase cooperation between our offices,” says Wong.
8. Fewer accidents, but general liability increases globally
In both Europe and the US, high frequency claims like slips and trips and workplace accidents have been reducing with more stringent safety regulations and better risk management, as well as a shift away from heavy industry in favor of services.
“Overall, we see no real tendency for an increase in frequency of liability claims in the US, and while loss costs have risen in some areas, this has not been an extreme increase,” says Crotser.
Big increases in vehicle safety have significantly reduced road traffic accident injuries over recent decades. For example, deaths from road traffic accidents in the UK reduced by 46% between 2005 and 2015, according to government statistics, while the number of serious injuries was down 24%17. In the US, road traffic fatalities have also been decreasing for the past two decades – they have fallen from a 1972 peak of around 54,589 to around 35,000 in 201518.
Air travel is another area where accident rates have fallen dramatically with improvements in risk management, technology and safety. Fatal accidents have fallen every decade since the 1950s, despite massive growth in air travel. In 1959, there were 40 fatal accidents per one million aircraft departures in the US, falling to around 0.1 per million today19.
Overall, improvements in risk management have significantly improved the workplace safety environment in many western countries in particular. For example, in the last 20 years there has been a downward trend in workplace fatalities in the UK, from just over one fatal injury per 100,000 workers to around 0.420.
“Take the food packing industry. It would once have been common to see machinery related claims for injuries to workers’ hands and fingers, but this has reduced significantly as machines have become much safer,” says Crotser.
This trend is also borne out by a corresponding reduction in product claims against packing machinery manufacturers, many of which were in Germany, according to Oenning.
While the frequency of personal injury claims has been trending down in the US and Europe, everyday claims in what were once the emerging markets are increasing with economic development. Generally speaking, liability claims have been increasing over the past five years in Latin America, with increased insurance penetration and with greater awareness of compensation among consumers, according to Santos Badin.
“There is an increasing tendency for a higher frequency of liability claims in Latin America from general, employers and product liability. Third parties are now more likely to bring a claim while people are more aware that they can claim for damages,” he says. “At the same time knowledge of insurance has increased and companies are more likely to claim from their insurance,” he adds.
The picture is similar in Asia, where, broadly speaking, personal injury claims have been increasing as consumers become more inclined to seek compensation from insurance.
“For general liability we see claimants becoming more litigious and with a tendency to make a claim. The market has been changing with increased customer awareness of their rights and with increased knowledge,” says Wong. Over the years, governments in Asia have strengthened the rights of consumers and investors, and made it easier to claim compensation in a range of areas, such as bodily injury, environmental and product liability.
9. Technology to drive big shifts in liability claims
Technology is likely to be a major driver of liability claims in coming years. Broadly speaking, the frequency of claims is expected to reduce although liability is likely to shift, with potentially increased liability for manufacturers and growing cyber liabilities.
For example, so-called smart factories should see fewer claims for workplace accidents while driverless cars are expected to bring about a dramatic reduction in accident rates over time, given 90%+ of accidents are currently believed to be caused by human error21. But automation is likely to lead to increased product liability for machinery manufacturers, component manufacturers and software providers.
Autonomous driving will have a big effect, believes Oenning. “The technology has really developed and the first autonomous cars are likely to hit the streets around 2020, after which we expect the percentage of autonomous cars on the roads to increase significantly. As a result, accident rates are expected to reduce, but we will see a shift in liability away from drivers to manufacturers,” he says. Technology is also changing existing business models and supply chains, disrupting well established lines of liability. For example, the US Food & Drug Administration (FDA) approved the first 3D-printed drug in 2016, an anti-seizure drug for epilepsy. The move introduces new liabilities to the traditional pharmaceutical supply chain model, expanding liability beyond doctors and pharmacists to include device manufacturers and software providers.
The growing “sharing economy” also raises new questions for liability. Liability in the sharing economy is likely to become more complex and potentially more challenging to apportion. For example, a road traffic accident involving an autonomous car share vehicle could involve the vehicle manufacturer, software provider and the fleet operator, as well as third parties involved in the accident.
The increasing digitalization of society and business also creates new liabilities, such as personal data and privacy exposures, as well as liabilities around business interruption, cyber security, directors and officers and product liability.
“Cyber claims are becoming more relevant. This is a huge area of growth for insurers,” says Oenning.
According to the 2017 Allianz Risk Barometer, cyber risk now features in the top three corporate risks overall and exposures are increasing. Companies are worried about the growing sophistication of attacks but many still underestimate the impact of technical IT failure, human error or even rogue employees, which can also result in costly damages. Meanwhile, data protection rules are becoming increasingly tough as government agencies around the world bolster cyber security. This significantly impacts businesses as penalties for non-compliance can be severe. For example, the introduction of tough EU data protections laws in 2018 will increase a company’s liabilities for data breaches or personal misuse in Europe. Fines for breaching the rules could be as high as 4% of global revenues.
Standalone cyber insurance has been designed to specifically cover business losses and liabilities arising from cyber exposures. Chief Claims Officer at AGCS, Alexander Mack, compares cyber cover to D&O insurance, which was an exception 20 years ago but is commonplace today. “We will see the same trend in cyber, within the next five years,” he predicts.
10. Impact of increasingly technical nature of claims, talent issues
and innovative tools
The insurance industry is aging and risks a “brain drain” of claims professionals if it fails to invest in future talent, according to Crotser, who has over 20 years’ experience of claims handling.
AGCS is being proactive in recruiting and training the next generation of claims professionals at a time when claims handling is becoming increasingly technical. As businesses grow ever more sophisticated and connected, insurers need to ensure that their claims handling processes stay up-to-date.
For example, a road traffic accident involving a vehicle with advanced driver assistance technology requires claims handlers to understand sensors and algorithms to determine the cause of an accident. In the pharmaceutical space, legal requirements and regulation for drugs is becoming more complex and requires more research to assess liability.
With an increase in interconnected risks and globalization, large liability claims are becomin increasingly complex and expensive. They typically involve more parties, can be multi-jurisdictional and can involve large numbers of claimants.
Not only do claims teams need technical knowledge, they also need the resource to deal with multiple insureds involved in the same litigation, but with differing interests.
The complex nature of supply chains and consolidation of certain industries can see an insurer representing multiple entities in a claim. For example, in the event of an air crash, the airline, manufacturer or component manufacturer may be liable, but each of them could be insured by the same insurer.
Such claims require Chinese walls and access to separate expert legal representation, and could potentially see one insured sue another. Liability insurers are also facing the challenge of a low yield environment and low premium rates, which creates pressure on expenses and can create tensions in claims handling.
“Liability for large commercial clients is complex and requires bespoke claims handling and strong relationships. So we need to strike a balance between service and the reality of income and costs,” concludes Crotser.