Case Study: claims, pricing and accumulation
Some years ago a young woman who had worked in a popcorn factory died of the rare lung disease, bronchiolitis obliterans.
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When the woman’s replacement at the factory was also diagnosed with the disease, an investigation was conducted by the National Institute for Occupational Safety and Health (NIOSH), which discovered the same condition in workers in several popcorn factories. NIOSH established that an ingredient in the popcorn flavouring called diacetyl, added to provide the pleasant buttery taste and fragrance, was causing the problem. The cases of bronchiolitis obliterans turned out be concentrated mainly among employees who were exposed to diacetyl fumes without the safeguard of respiratory protection or strong ventilation of the workplace. Ironically, the concentration of diacetyl was increased to reduce the fat content of the flavouring and thus make the product healthier. Legal action was inevitable, against the popcorn manufacturers for failing to provide safe working conditions, and against the diacetyl producers for omitting to issue sufficient hazard warnings. The initial lawsuits triggered mass tort actions, which all the people who had worked in the affected plants were invited to join, and the industry ended up spending a sum in the three-digit millions of USD to resolve the problem. Only one case of a consumer who alleged having been harmed by the fumes escaping from freshly popped microwave popcorn bags was successful.
One of the questions facing insurers is how an event of this type, involving inappropriate use of a harmful substance, can be modelled so that the risk can be assessed and mitigated. Swiss Re has developed a forward looking modelling tool called Liability Risk Driver (LRD) for that purpose. Based on loss scenarios and taking into account the context (geographical, for example) and the influencing factors, the tool simulates the chain of events from the point where something goes wrong, and it calculates the potential costs to the manufacturers and insurers.
At Swiss Re we usually refer to a liability catastrophe as an event with an insured loss of above USD 20 billion. With regard to food safety, Swiss Re took four scenarios and considered whether they could exceed that threshold of USD 20 billion. These were misleading advertising, harmful additives, adverse effects from functional foods, and unhealthy food forming the object of legal action. All the scenarios are very unlikely on a large scale and some virtually impossible in the current legal environment. But if they should occur, the two which could go over the threshold are the harmful additives and unhealthy food scenarios. For these, the estimated losses to the insurance industry could run to a staggering USD 150 billion.