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TRENDS IN INSURANCE CLAIMS

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  1. TRENDS IN INSURANCE CLAIMS

  2. Claims TrendsIntroduction • Focus on claim trends in: • Property insurance. • Commercial general liability insurance. • Directors and officers liability insurance. • Report on recent case law. • Reinsurance claims that may arise from the trends.

  3. PROPERTY INSURANCE

  4. Major Market Influences In Property Insurance • Globalization/Supply Chain. • Climate Change/Green Coverage. • Developments in Property Insurance Law.

  5. Globalization • Supply chain has grown increasingly complex. • Reliance on outsourcing (mftg, parts, services). • Just-in-time inventory. • Single source vendors.

  6. Globalization • Survey of 600 financial executives. • Supply chain risk – greatest threat. • Physical disruption to supply chain. • Mitigation.

  7. Globalization • Japanese auto manufacturer. • Single source – brake valve supplier.

  8. Supply Chain Coverage • Contingent Time Element (direct suppliers). • Dependent Time Element (direct and indirect suppliers).

  9. Supply Chain Coverage • Challenges for insurers. • Site access. • Jurisdictional issues. • Determining coverage. • Determining quantum. • Control over exposures?

  10. Climate Change • Increase in frequency and severity of fire and natural disasters (wild fires, hurricanes, typhoons, droughts). • Companies – heightened awareness. • Looking at sustainable building designs – going “green”.

  11. Climate Change • “Green” buildings – new designs, products and materials. • More efficient use of energy. • Local code changes: incorporating “green” building standards.

  12. FM Global – Going Green • U.S. Green Building Council’s LEED Gold Standard:

  13. FM Global – Going Green • $154M project - $60M building. • “Green” - 8% of construction costs. • Every room monitored with sensors (climate, lights). • 95% of construction debris was recycled. • Carpeting – 100% recycled materials. • Exterior blinds to regulate sunlight.

  14. Green Coverage • Emerging property risk exposure. • What if the manufacturing plant was not “green” at time of loss? • Local code enforcement required green. • Voluntary measures.

  15. Green Coverage • Potential for large uninsured losses. • Prompted insurers to develop “green” enhancements/endorsements. • Coverage – additional costs (products, materials, methods) to repair/rebuild to “green” standards.

  16. Green Coverage • Green enhancement at another facility? • Install a geo-thermal generator? • Green recovery even though no rebuild? • Increased period of restoration? • Property and BI exposures.

  17. Industry Perspective • New emerging exposures – minimize disputes between cedents and reinsurers. • View our treaty reinsurers - partners. • Treat them fairly (notice, information, transparency).

  18. Industry Perspective • Credibility. • $1.1 billion of $4.6 billion in gross premiums. • Dependency on treaty reinsurance – from 26% to 14%.

  19. Industry Perspective • Facultative reinsurers (per risk). • Incidence of disputed claims higher – shared/layered programs. • Challenges to “follow the fortunes”. • Ex gratia – “commercial” payment.

  20. PROPERTY INSURANCE SURVEY

  21. Property Survey • Survey of Professionals. • Over 350 claims professionals asked to respond to six question survey. • 73 people (approx. 20%) participated. • 85% claims executives or managers. • 76% HPR, Large Loss or Middle Market • 50 people provided additional comments concerning specific claim trends.

  22. Property SurveyThe Number of New ClaimsVaries Widely

  23. Property SurveyCoverage Problems onthe Increase

  24. Property SurveyMeasurement Disputes AreAlso Increasing

  25. Property SurveyDifferences Between Market Segments

  26. Property SurveyDifferences Between Market Segments

  27. Property SurveyDifferences Between Market Segments

  28. Property SurveyDifferences Between Market Segments

  29. Property SurveySpecific Trends Identified • Hurricane (9 Respondents). • Public Adjusters (8 Respondents). • Excessive Claims (6 Respondents). • Crime (5 Respondents). • Time Element (4 Respondents). • Experienced Claim Adjusters (4 Respondents).

  30. Developments in Property Insurance Law

  31. Property Insurance Law Physical Loss and Fortuity Abbey Company, LLC v. Lexington Ins. Co. (C.A.9Cal. 2008) • Island ferry service insured ferry and property intended for its use. • A divided court found silting of the channel was physical loss insured under the policy.

  32. Property Insurance LawPhysical Loss and Fortuity Wakefern v. Liberty Mutual (N.J. Super 2009) • Insured lost power during an outage. • The policy covered power interruption that results from “physical damage.” • The New Jersey Appellate Court found that “physical damage” is present when property is not available for use, as a result of a “physical incident.”

  33. Property Insurance LawPhysical Loss and Fortuity Markwest Hydrocarbon, Inc. v. Liberty Mutual Ins. Co. - (10th Cir. 2009) • Following an explosion, the DOT ordered insured to undertake testing and maintenance. • The policy covered “all risks of direct physical loss or damage.” • The court found maintenance and testing was not insured – only fortuitous losses are covered.

  34. Commercial General Liability Insurance

  35. Emerging CGL Claims • Predicting next wave of major CGL claims. • Status of law/science underpinning emerging risks. • Major developments in asbestos and pollution claims – still most significant claims facing CGL carriers.

  36. Predicting Next Wave • Accurate prediction of potential claims inherently difficult. • Broad scope of CGL coverage. • Open-ended nature of “occurrence” based policies. • “Claims-made” policies enhance predictability/finality. • Competition may limit marketability.

  37. Predicting Next Wave • Blockbuster losses typically arise from either: • Single catastrophic event. • Or, widely-used products/practices. • Harmful effects not fully appreciated at time of use. • Activity largely unregulated. • Long damage/disease process. • Injury/damage not apparent for long time.

  38. Predicting Next Wave • “Emerging claims” fitting profile. • Food contamination outbreaks. • Lead paint. • Climate change. • Toxic torts. • Nanotechnology. • BPA.

  39. Food Contamination Outbreaks • Sharp increase in the number of outbreaks – massive recalls. • Specialized policies exist, but CGL impact too. • To date, largely property damage event.

  40. Food Contamination Outbreaks • Significant coverage issues. • “Impaired property” exclusion. • “Sistership” exclusion. • “No-injury” claims. • Insured’s contaminated product integrated into 3rd-party’s product.

  41. Lead Paint • Escalation feared as result of public nuisance suits. • Cases brought by states/municipalities. • Would require remediation of millions of dwellings. • Feared result has not materialized. • Only adverse verdict overturned on appeal by the RI Supreme Court.

  42. Climate Change • Huge potential for significant claims • Energy companies/ automakers. • Liability suits have failed – political questions doctrine. • Scientific studies narrowing area of legitimate debate. • Increased carbon emissions regulation. • Merits continued close monitoring.

  43. Asbestos/Pollution: Developments • After 30 years of litigation, important coverage disputes remain. • Important 2009 high court decisions. • Mass: Boston Gas • Cal: Stringfellow

  44. Asbestos/Pollution: Developments

  45. Asbestos/Pollution: Developments • Goal of global settlements: Finality. • Increasing efforts to circumvent global settlements. • Rescission claims by insureds. • Contribution claims by other insurers. • Attacks on scope of bankruptcy orders. • Challenges to Exhaustion.

  46. Directors and Officers Insurance

  47. “D&O” Background • 3 Basic D&O Coverages: • “Side A” Coverage: directly afforded to D&Os. • “Side B” Coverage: reimbursement afforded to the company for indemnification obligations to D&Os. • “Side C” Coverage: direct coverage to the company for its own liabilities. • D&O is typically written on “claims-made” basis.

  48. Global Financial Crisis • Recipe for a Spike in D&O Claims. • Subprime and Credit Crisis. • Demise of Prominent Investment Banks and Financial Institutions. • Collapse of World Markets. • Global “Recession”.

  49. Bankruptcy http://www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsJun2009.cfm

  50. Claims Exposure • D&Os face legal exposure from bankruptcy filings and bank failures. • Corporate bankruptcies typically lead to an increase in securities litigation. • Since 1995, 35% of the large public companies filing for bankruptcy have also sustained securities class action lawsuits against their D&Os. • In 2007 and 2008, this number ballooned to 77%.