Should US Casualty Switch To Claims Made?

No. How’s that for a short post? But I suppose I should explain my answer.

For those that didn’t see, Chubb and Zurich are trying to push the US casualty market to change from occurrence to claims made. I don’t think they will succeed and I don’t think they should.

However, I also don’t like binary answers. There are issues with both forms and I think there are more creative ways to address the problems with occurrence than doing a full 180 switch to claims made.

Why Claims Made Won’t Work

Here’s the first problem with a claims made casualty form. Insureds won’t buy it!

I mean, let’s get real. Why would a large insured agree to this? How are they going to explain to shareholders decades in the future that they don’t have coverage for a large tort because they switched from occurrence to claims made to save a few bucks?

This isn’t D&O where claims emerge pretty quickly. If a company does a merger, that merger suit is filed the next morning by some enterprising lawyer. If the stock crashes due to some management “mistake”, the suit is often filed within days.

There is little latency between the proximate event and the awareness of it, so claims made works just fine. (Yes, I know this isn’t always the case but it is often enough to support the point.)

In casualty, the claim may not be known by the cedant for decades. Insurers obviously understand that which is why they keep IBNR for ancient accident years.

If you tell a client you won’t cover them for that risk, then you’re not really insuring them for liability anymore, so why do they need your product?

In other words, if a client wants to save some premium by not buying coverage for long tail liability, the insured would be better served setting up a captive than buying third party claims made.

That way, if there are no immediate claims, at least they can build significant surplus for a rainy day fund for when that latent liability emerges down the road.

So what Chubb and Zurich have announced is effectively insurance vaporware. It’s not much more than a press release of a product that the market has no interest in.

Hybrid Coverage

So what could Chubb and Zurich have done as an alternative if they wanted to address the legitimate issue that insurers shouldn’t be on the hook forever for unknowable claims they couldn’t have possibly priced for at the time?

I have a few ideas. They require some forward thinking, and a little groundbreaking, but I don’t think they are unachievable.

Rather than only offer chocolate or vanilla, how about some rocky road or mint chocolate chip?

This industry is so reluctant to try new things that it ends up facing these false choices of full coverage or no coverage when there are plenty of other viable alternatives.

#1: Occurrence with an expiration date

Insurers are rightly worried about selling “forever coverage”. But why does it have to be forever or just one year?

What prevents occurrence coverage that only covers occurrences that incepted in the last 10 (or 20 or 25) years? This removes most of the zombie exposure while still giving the client what they need.

My preference would be 25 years, but you know what, who says there has to be one universal term?

If Chubb wants to sell 10 years while Zurich sells 20 and Travelers lets you choose from 10, 20, or 25, then that’s what makes a market.

Wouldn’t that be best for the client and the insurer? Offer more than vanilla or chocolate!

We’re now doing casualty ILS that truncates the coverage after a set period of time. This is not much different other than that it’s client facing.

If the will is there, then there is a way to make this option widely available instead of making excuses and whining about the problems within casualty occurrence.

#2: Occurrence to close

This is a variation of Lloyd’s reinsurance to close. After a set period (25 years?), the insurer can invoke a right to close leaving any residual exposure with the insured.

It’s basically a pre-determined commutation. Perhaps there would be some return of premium if results were favorable which the insured could set aside as a reserve for any residual exposure that may arise from some unexpected future claim.

#3: Claims made with a lookback

This is just a variation of the first idea. When you write claims made, expand the timeline for prior acts.

Start with a default of 10 years regardless of who the prior insurer was (assuming obviously no reason to suspect a ticking time bomb).

Of course, there is some risk to that but, if you trust your underwriting, you should be able to select clients who won’t burn you on the tail. Perhaps the market can standardize around subrogation terms against the prior insured if a latent claim emerges within the first year at the new carrier to mitigate this risk?

#4: Claims made with a surcharge to invoke prior acts

This is going to be trickier to structure, but I think it’s doable. Give the client the 10 years of prior acts, but the client has to pay a surcharge if they file a prior claim.

Think of it like a reinstatement premium. Using the prior act coverage would be equivalent to buying a reinstatement. It’s not going to stop a client from filing the claim but at least you get some extra premium for the trouble.

#5: Disappearing Limits

This is probably my favorite one. After ten years, the limit available under the occurrence policy shrinks. Let’s say it declines 5%/year, so after thirty years, there would be nothing left.

In other words, if I wrote $50M for an asbestos manufacturer in 1972, I would still have exposure of $50M in 1982, but it would decline to $25M by 1992 and $0 by 2002.

While not the primary motivation, this creates interesting incentives for plaintiffs to file quickly rather than keep looking for more peripheral defendants to sue, so it should cut down on some of the specious torts. It also cuts down on the never ending supply of class members that emerge decades later with suspicious claims of harm.

The bigger reason I like it is it creates an alignment of interest. Insureds can’t ignore issues (e.g. molestation) and hope they go away knowing the insurance will still be there if they eventually give in. It creates more urgency to identify risks when they can still be settled for smaller amounts.

There is also precedent for this type of coverage. Think of roof schedules that reduce the payment homeowners get for roof damage once the roof passes a certain age.

Find Solutions That Meet The Client’s Needs!

I could keep throwing ideas out there, but you hopefully get the point. Whether you like my suggestions or not, you can probably agree there are ways to find original options that solve the insured’s problem.

This industry’s default reaction to any type of claims they don’t like is to pull the coverage rather than innovate.

The truth is, we don’t need large investments in AI to make the industry more efficient. We need common sense and a focus on solving client’s problems.

Most of these issues aren’t that hard. I whipped up my five ideas above in an hour. What is the industry’s excuse for doing nothing for decades???

If insurers want to be relevant, they need to directly address client’s problems rather than duck them. That may work well enough in personal lines where people are forced to buy coverage, but large commercial insureds can easily go the captive route if they think the industry is failing them. And many have.

Putting out press releases and thumping your chest at industry pow wows isn’t bold. Creating new and innovative products that solves today’s problems (and not those from 1986) is. When are we finally going to get started?