Monster lurking: Liability impacts from natural disasters

Since 1950, the cost of natural disasters to the insurance and reinsurance industry has increased dramatically. In 2010 the costs tripled that of 2009 and now only months into 2011, the insured loss estimates from Asia alone has almost exceeded the expected loss estimate globally for the entire 2011.

In the aftermath of each disaster, we consider the economic impact of these disasters, and the subsequent insured loss component. Whilst first party covers, such as property, are the most commonly affected, what can often be underestimated is the consequence that such events can have on a Casualty portfolio.

What Casualty classes are impacted?

When considering which sections of a casualty portfolio might be the most affected, the first that come to mind for most people are first party covers such as Workers Compensation, Personal Accident and Motor Own Damage.

However, we are increasingly seeing a 'lurking monster' in casualty, with claims arising from other covers such as general liability, professional liability and personal liability. It is within these classes that losses may not typically be expected when natural disasters occur but can have a material claims liability. The claims are arising from injured parties and land owners, as well as legal recoveries from property insurers as they look to assign legal liability to third parties for their part in contributing to the severity of their loss.

Our experience so far…

In general, the specific classes of liability lines impacted by natural disasters may vary from markets to markets, depending on many factors such as the legal framework, litigious culture, insurance penetration, terms and conditions, etc.  It also depends on what types of natural disasters occurred.  The following are some examples for illustration only.

On a global scale, we have seen liability claim settlements in the US$100's of millions in the aftermath of floods, bushfires or storms, with much of the burden falling back to government entities due to their management of infrastructure, building standards and emergency warning systems.

Early reports in the aftermath of Hurricane Katrina indicated initial estimates of US$1-3bn arising from liability claims alone (Towers Perin, October 2005). This represents around 2-5% of the overall P&C loss estimate. This estimate was driven by claims arising from the Directors & Officers, Professional Indemnity, Environmental Liability and General Liability classes. Hurricane Katrina occurred in 2005, and whilst some of these cases have now been settled, there are still ongoing claims taking place, which highlight the lag in notification of potential losses as well as lag before final settlement.1)

The recent natural disasters in Australia and New Zealand illustrate experience, such as:

2011 Queensland Floods

After the clean up, media speculation began around potential general liability or professional indemnity claims that might arise against utility providers over alleged negligence in the management and procedures of a dam, which were alleged to have contributed to the extent of the flooding in Brisbane.

2011 Christchurch EQ

There was media speculation that insurance brokers potentially might be sued due to their alleged negligence in providing adequate insurance for their clients' needs. In addition, the councils in New Zealand could allegedly be found to be negligent in their duty to ensure new buildings were properly constructed.

Be mindful of your portfolios

These are only a few examples. What has become increasingly apparent to portfolio managers and casualty underwriters around the world is that natural disasters have an impact on insurance covers that extend well beyond first party Property and Motor covers. It is important that casualty underwriters are mindful of how natural disasters may impact their portfolios and look to manage exposures accordingly.

1) Towers Perin. (October 2005). Hurricane Katrina: Analysis of the Impact on the Insurance Industry.

Published April 2011

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