Social inflation, cyber, pricing: what the post-COVID-19 industry will deal with next
There are things in the air that concern re/insurers: higher inflation, an economic recovery that may or not last, more variants of the SARS-CoV-2 virus. But one issue has come up repeatedly on the Re/insurance Lounge, Intelligent Insurer’s on-demand platform for interviews and panel discussions with industry leaders: social inflation.
It is a subject that Jason Richards, head of casualty underwriting reinsurance at Swiss Re, has thought a lot about this year. “We’ve seen waves of it in the industry in the past and now we’re in another one. There’s a skew in the loss distribution, with larger losses and loss severity going up, which is affecting some of the segments within casualty,” Richards said.
Social inflation is the term used to describe increased insurance losses arising from litigation. In 2020, Swiss Re published a report, “ US Social Inflation Amid the Covid-19 Recession–Here to Stay?”, that looked at the issue. It posited that the ongoing COVID-19 pandemic would cause a rise in social inflation, saying that in the US it was “driven primarily by outsized awards for non-economic damages” and calling for a “policy reset that prioritises inclusion and equality”.
“Social inflation occurs when individuals are less happy with large corporations. When those corporations do not perform their duties, the individuals want to be compensated. Litigation funding has been a major driver, particular in the US, along with a lack of tort reform in recent years,” Richards explained.
“Those things have led to the increase in loss severity. And while it’s bad in the US, it’s not an isolated phenomenon.”
“Litigation funding has been a major driver, particular in the US, along with a lack of tort reform in recent years.” Jason Richards, Swiss Re
Pandemic effects
A lot of this is influenced by the ongoing pandemic, so is the thinking towards pandemics within Swiss Re different in 2021 from how it was in 2020? Last year, the world was taken by surprise, but we have since become more used to the tumult that a pandemic brings.
“It’s changed dramatically how we work from day to day and the interactions with our clients have pretty much all become virtual. But the situation is working,” Richards said.
He has a broad remit at Swiss Re, where he is responsible for the casualty underwriting business, which includes the longer tail lines, general liability, financial lines, motor, workers’ compensation, and cyber. He also leads the P&C Solutions area, which aims to help clients around the world with some of their day-to-day growth and performance challenges.
When it comes to underwriting, the impacts of the pandemic have varied between lines of business.
“On motor lines you can see an immediate impact because people were not driving as much. Loss severity and frequency went down a lot during COVID-19 lockdowns, but now things are coming back quite quickly as people have started driving and moving around again, and the number of kilometres driven has started to increase. That’s made that line of business come back quickly,” he said.
Within other lines such as general liability and financial, the recovery is still at a nascent stage. “We don’t know if the pandemic will lead to a lot of litigation,” said Richards.
“We see indications that severity and frequency are low, but we don’t know if that’s due to delays in reporting or observing, along with legal systems being shut down. We also don’t know if it will catch up over time. That’s a big story for this renewal season.”
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“We need to eliminate the silent cyber exposures that we have in some lines of business.”
Capacity and cyber
Richards said that capacity currently differs by geography. “If you look at some markets, such as Asia, capacity is still strong. The originally policy limits remain quite limited so the amount of coverage that’s granted in something like the motor line or the lability line remains limited.
“In US and EMEA, limits are at a high level, with some exceptions. Interest in casualty is high, too, as it is in the reinsurance market.
“Overall, however, the rating environment is certainly better than it was 18 or 24 months ago,” he said.
Looking ahead, the other big topic for Richards is cyber insurance, or the ability of insurers to help businesses avoid, tackle, and recover from cyber attacks, including the phenomenon of ransomware.
“That’s a trend that’s picked up in the last 18 months,” he said.
“We are definitely concerned about that. We’re in a very, very important period for cyber. First, we need to eliminate the silent cyber exposures that we have in some lines of business, make sure that we know what exposures we have, and ensure that we’re costing for them in an appropriate way.
“There’s room to tighten the policy wordings and improve pricing. Cyber hygiene is important, too, particularly around patching and passwords. It’s a very important line of business that is still a small piece of the big global insurance world, but is growing and getting a lot of attention,” he concluded.
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