Christian Lahnstein advocates a more consistent approach to emerging risks
Insurers and reinsurers are concerned with similar lists of widely varying 'emerging risks', including real or feared mass tort actions in the US. However, acting in increasingly over-informed and over-alarmed societies, insurers should not forget that institutions which know about risks should also be capable of distinguishing and taking - risky - decisions between what they consider to be problems and what they see as smaller or non-problems. I propose three systematic approaches to this.
International insurers and reinsurers can be credited with a certain degree of experience with catastrophes. But the question is, given the individual character of each catastrophe and the diversity of scenarios, how far can they meaningfully 'process' such experience? This is hardly possible using actuarial methods alone. It calls for methods that are probably more akin to those of a historian than those of an actuary, scientist, economist or legal expert.
A structured overview of large-loss scenarios should differentiate between causes and consequences, and short-term and long-term scenarios. (See figure 1 - catastrophe cube).
Causes fall into four categories: natural hazards; technological risks including infrastructural risks such as mass losses arising from road, rail or air transport; social and political risks; and pure financial risks. The loss consequences can likewise be divided into four categories: environmental damage, personal injuries, property damage and purely economic losses.
A distinction should also be made between short-term and long-term scenarios: accidental pollution versus long-term soil and water pollution or climate change; technological short-term risks (industrial accidents like Bhopal 20 years ago) versus long-term risks (toxic torts like asbestos); political short-term risks like terrorism versus a new type of long-term risk affecting corporations - the trend to rework historical injustice under the aspect of tort law.
Megatrend of bodily injury compensation: social and institutional factors
If we look at the frequently quoted trends of change in the international liability insurance markets, what is noticeable is that although some of them are associated with IT, financial or environmental risks, most are associated with health risks. Social and institutional factors create a bodily injury compensation 'megatrend'.
- Improving compensation of bodily injury has become mainstream in tort law developments (worldwide with exceptions in the US and Australia), involving mainly damages for non-pecuniary loss, and also in relation to personality rights.
- Compensation for bodily injury continues to be the subject of social security which has constantly expanded over the course of the 20th century. Since the 1980s, however, there has been a trend reversal: the 'end of the welfare state', fewer benefits, more subrogation and tort law replacing social security. On the other hand, rising medical costs affect both health and liability insurance.
- Responsible corporations are changing behaviour, treading the fluid borderline between legal, moral and factual liability, responsibility or accountability.
- The role of lawyers, medical professions and the pharmaceutical industry has developed with 'solutions looking for cases'.
- The role of liability insurance has grown including liability insurance contract risks in all long-term bodily injury cases, with open trigger and aggregation definitions.
- Conflicts of interest arise between multiple claimants, multiple defendants, multiple liability insurers and reinsurers, with multiple external lawyers involved in complex long-term litigation.
- The Internet plays a role in informing, organising victims' associations and facilitating contact with lawyers.
- The precautionary principle has an impact on state and corporate decision taking. (See figure 2).
The risk of liability developments: conceptual framework
How we observe emerging risks has to be consistent with how we generally observe developments in liability and insurance. In connection with this, Tom Baker recently proposed an observation pattern and conceptual framework in The Geneva Papers(1). (See figure 3).
Legal developments are defined by the legal system: legislation and jurisprudence. Injury developments, injury cost developments, standard of care and claiming developments are defined by broader social factors. All these developments interact, and there are open borderlines, for example between what can be regarded as 'law in action' legal developments or merely as factual claiming developments.
Using this conceptual framework, the results not only of the emerging risk debates but also of diverse investigations can be combined and inter-related. For example, Munich Re has ongoing research projects on the impact of liability insurance on tort law and on the social construction of bodily injury in liability and disability insurance.
How can the three approaches outlined above be useful?
Systematic approaches are required to prevent insurers from becoming victims of the snowball effects of public risk perception. On the other hand, whether a system is useful or not depends on whether it provides clear insights. The rest is superstition.
The catastrophe cube (see figure 1) helps to illustrate that most catastrophes result in all four types of losses and affect all classes of business, although in different combinations and depending on historically developed market structures, which differ from one country to the next.
It is more important to gain an understanding of the institutional momentum of the stakeholders generally involved in personal injury compensation and their interactions than of the medical details of whatever toxic risk debate happens to be current (see figure 2).
Instead of speculating about future emerging risks, we need a conceptual framework that allows us to sharpen our general perception of risk developments in liability and insurance (see figure 3). This is in our own interest and also helps us to better comply with our obligation to inform the public.
(1) BAKER, T. 2004, "Insuring Liability Risks", The Geneva Papers on Risk and Insurance - Issues and Practice, 29 January 2004, pp 87-106.
Christian Lahnstein is legal counsel, Munich Re.