Potential shock emanating from casualty accumulation

As we intensify our path to globalisation and strengthening interconnectivity, the powerful dynamics of supply chains, financial markets, legal and political institutions produce not only emerging risks, but new ways that existing risks interplay. We soon realise that our ability to identify and manage our exposure to contagion or accumulation of casualty risk becomes increasingly important, but also challenging.

Insurers and reinsurers face a diverse range of accumulation scenarios depending on the nature of their portfolios. These can be broadly classified into several categories and illustrated with a few real world examples:

Event clash:  In 2004 part of the roof of Terminal 2E at Paris Charles De Gaulle airport collapsed, leading to loss of life, serious injury and extensive property damage. There were up to four hundred parties involved in the construction, maintenance and/or oversight of the building in the incident.  The number of insurance policies that responded to this event was in the hundreds and many of these policies where written by the same insurer/s.  The impact of this single event on their portfolio was not necessarily foreseen.

Supply chain:  In 2013 a range of popular processed meat products sold in Europe were found to have contained horse meat.  The source and/or responsibility for the contamination was not clear as the ingredients and products, as part of the production and supply chain, had traversed Europe, from Romania to Spain and the UK.  Responsibility was therefore applied to a vast number of parties, from abattoirs, processors, traders and supermarkets.  The free trade area of the EU and the complex interplay of supply chain dynamics employed to get food produce on the consumer's table, illustrates the difficulties in tracing exposed parties and identifying these accumulating exposures in an insurer's portfolio. 

Business disaster:  In a financial context, accumulating loss can also emanate from a business disaster such as the Westpoint investment scheme collapse in Australia in 2006.  This company failure led to thousands of claims against advisors who in the years prior, had recommended the failed scheme without appropriately disclosing the risks.  The breadth of the financial planning network meant that hundreds of financial advisors and their insurance policies were called on to respond to the losses of more than 2,000 investors.

Systemic accumulation:  This form of accumulation arises from the repetition of a flawed common practice.  It occurred in the UK between 2007 and 2013 in what is known as the pension mis-selling scandal, where thousands of financial advisers in the UK advised clients to transfer from defined benefit pension schemes to accumulation schemes without appropriately disclosing the risks.  Almost two million people were affected by this practice, and the offending advisers and their insurers now face a raft of class action litigation to recover billions of dollars.

Even more challenging are accumulations influenced by financial market or political shocks that may not, in isolation, be an insurable loss – for example losses from the ‘sub-prime’ mortgage crisis of the late 2000's.  The impact of ‘sub-prime’ continues to be much broader than merely revealing losses of those directly involved in the practice.  It has been most damaging in its collateral effect on broader investor behaviour, market fluctuations, consumer confidence, general economic conditions and government policy response.  While not direct causes of insured loss, these effects can act to realise losses in insurers' portfolios within a much shorter timeframe than under ‘normal’ market conditions, which can cause huge swings in insurer's results in the short term.  Furthermore, given the complex interrelationships of financial markets, the more insurance policies and capacity sold, the bigger the underlying loss becomes, i.e. given financial markets are a 'zero sum game', financial market accumulations become circular and therefore almost unlimited, unlike bodily injury and property damage which generally have finite values.

As we observe the progress of an increasingly interconnected globalised world, we need to recognise that casualty risks operate less and less in isolation.  An insurance portfolio is more than merely a collection of independent risks, but rather a complex, at times fragile, network of interdependency.  Identifying and measuring accumulation risk in an insurer's portfolio has become increasingly vital in managing volatility in annual results, protecting capital and supporting the overall resilience of the insurance industry.   By taking a forward looking approach to casualty risk, and in particular, its accumulation potential, the industry can more accurately model accumulation scenarios and develop products to best mitigate these risks.

Published 15 June 2015


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