Participants:
Andrew Barberis
Global Claims Officer, Excess Casualty and Healthcare Professional Liability
AIG
Anthony DeFelice
Managing Director and Casualty Practice Leader
Aon
Alan Gier
Global Director, Corporate Risk Management & Insurance
General Motors Company
Although a great deal of attention has been paid to cost-control initiatives in the workers compensation and healthcare arenas, liability costs are escalating for many organizations. In a roundtable discussion, sponsored by Aon, a panel of industry experts discuss what is driving increasing claims and litigation costs and examine how insurers, brokers and risk managers are responding to these developments in the casualty market.
Reserve releases have been declining for the past few years and some carriers are strengthening their reserves in response to deteriorating casualty results. What are the biggest factors causing this deterioration in the casualty market?
DeFelice: It has been a challenging market for a long period of time. We’ve been in a prolonged soft market for the vast majority of casualty insureds that are out there. The softening was caused by the overcapacity that exists in the marketplace. From a theoretical perspective, in terms of looking at all the advertised capacities from all of the insurers that are providing coverage for U.S.-domiciled insureds, we’re standing at about $4 billion. The most that we have been able to put together for any one single risk is about $1.5 or $1.6 billion in terms of total limits and that far exceeds the needs of most casualty clients. You can combine the softness of the market with what is going on with medical cost inflation, which is a large component of any casualty claim, as well as medical technologies that have advanced so far that people who would have typically died in an accident are now able to prolong their life, increasing the cost of life-care plans. That obviously is having an effect.
In addition, we have jury awards that are jaw-dropping. What we see is this populism sweeping across America that, if you are a large corporation, you need to be punished. Even in cases of liability, juries might tangentially relate a certain incident or accident to a large corporation and the large corporation, as well as the insurer, gets saddled with the end result.
There’s an aggressive appetite out there to write new business and to retain business and as the consequence of that, the oversupply is really putting pressure on in terms of pricing. From a casualty perspective, because this is a long-tail line with costs that might not be apparent until five to seven years down the road—and perhaps even 30 years when you’re talking about workers’ comp—our advice to clients is that price should not be the only governing factor when purchasing insurance. It really should be about those insurers that have the financial wherewithal to honor that promise to pay.
Barberis: Being on the claim side, I have the perspective of the loss-cost side and at AIG, in the excess casualty space, we call it the frequency of severity. It’s no longer just about the severity but rather how many severe cases we’re getting out there. Most of them are in judicial hellholes, but not all of them. We are seeing severity throughout the nation. To give you some sense of what that’s about, the biggest cases for AIG in 2016 and 2015 were about $700 million. That’s about 30% higher than the five years prior. The biggest cases are getting more expensive and we’re seeing cases that traditionally had not been in the top 20 creep in. We really didn’t see a lot of big auto cases crack our top 20, for example. That has changed. Now auto has become front and center with the losses that occur both on the product side and the general liability side.
There has been a lot of discussion about what’s going on in the auto space with distracted driving and things of that nature and, over the last couple of years, an increase in fatalities on U.S. highways. Deaths on the highway in 2015 were up about 7% or 8%. To quantify that in terms of numbers, there were 35,000 fatalities in 2015 as compared to 32,500 in 2014, so that’s 2,500 more deaths. In the first nine months of 2016, it was up another 8%. That’s another 2,000 deaths. Do your math there and you have 4,500 deaths. If you use a $1 million average on a death case and just use the increase over the last two years—4,500 death cases—that’s $4.5 billion in just wrongful death cases in just accident years 2015 and 2016 that we didn’t have in 2014. So from a claim perspective, it is clear not only that we have more severity out there, we have more of the severity.
Al, what do you see from the risk manager’s perspective?
Gier: We are a large self-insured and we also have a very large fleet that we manage both for individual employees as well as for testing and suppliers and the like, so we get a really good peek at what is going on in the auto liability space. We do have excess cover, so in terms of what we’re seeing—and I think our fleet is really well managed with a lot of controls in place to ensure that the right person is getting behind the car and they understand the risks and the safety features that are now on our vehicles—we’re seeing a light to moderate increase. But on the other side, with regard to reserve strengthening, especially in the excess layers, I will say this is causing us a little bit of concern. We perform a quarterly review at the CFO level, we call our share-of-wallet review, where we look at every insurer against the three major rating agencies—A.M. Best, Fitch and Moody’s. Is anything changing? Are they going up or going down? And as we report out on that, we are watching very closely, not only our current towers, but on our legacy towers as well. There is a little heightened sensitivity but we find it interesting that some companies are maybe just seeing it sooner and so we’re a little bit surprised that we are not seeing other insurers strengthen reserves. It would seem that they can’t really be that far out-of-line and others are experiencing pretty much same thing.
What trends are you seeing in auto severity and liability costs in general?
DeFelice: In the last six months, I have personally witnessed three single-person accidents where we had jury awards and settlements in excess of $40 million. Historically, you would never see that. As matter fact, the underwriters wouldn’t even charge for auto excess of $10 million because they thought that was there going to be a non-event. Because of some of these jury awards, some of the judicial hellholes, and some of the settlements that are out there, we increasingly see those numbers creeping up. As a result of that, we do see some pressure from underwriters in terms of either raising their retention or trying to achieve more in rate.
From a trucking perspective, there is a driver shortage out there. As a matter of fact, recently on a news program on Sirius XM radio, I heard five different advertisements for trucking companies trying to recruit truckers to come and join them. Obviously that means that you have less experienced people who are out on the road and less experience tends to lead to auto accidents. We talk about inattentive driving, distracted driving, cell phones, texting, etc., and that all leads to some pretty ominous endings when it comes to bringing a case in front of a jury. The fact of the matter is that we have seen this explosion, these nuclear verdicts, on the automobile liability side that we have never seen before and I think that is something that everybody should be paying attention to.
Gier: We are in the personal mobility space and I think that is an area that is so green with ride-sharing and all the different iterations of that particular activity that I think the exposure there is a bit unknown at this point. If you look at who got into ride-sharing initially, startup companies have a different view of the world, and as we get into it, we’re starting to see things a little bit differently than they do. We think there is potential for risk either from a regulatory standpoint or from the legal framework.
DeFelice: I also think, from an auto liability perspective, it’s probably easier for a plaintiff’s bar to perfect an auto liability case and to get big dollars out of that case as opposed to going after a products liability. It costs them of a lot of money to investigate and recreate accidents. On auto liability, it’s pretty straightforward.
Barberis: No doubt. Tony talked about casualty, in particular excess casualty, being long tail. That is certainly true. Many of our cases are five, seven, eight, 10 years out from date of accident to resolution. Auto is the shortest of those. They are relatively simple cases. You don’t need to be a great trial lawyer to maximize that case when a truck doesn’t stop and plows into 10 vehicles and kills three people.
But in order to never miss an opportunity, plaintiff lawyers are very aware of what juries think and one of the things that juries seem to be particularly enraged about is distracted drivers. Plaintiff attorneys rather routinely now, in their initial discovery request, want to know exactly what kind of electronics were in the cab, either electronics that belong to the person driving and/or some of the dispatch technologies out there. And they’re very good about connecting the dots about people who are on their phone either texting, talking, surfing the web, or even truckers who watch movies on 12-hour rides. So they take what was a very straightforward, simple case and do a nice job of making the jurors feel that those truckers out there are predatory and that they could be next.
What are you seeing with respect to tort awards and litigation? What about punitive damage trends? Is tort reform working?
Barberis: There is a lot of talk about tort reform and I respond rather uniformly—don’t anticipate any. When I talk to the underwriters, I don’t see any relief coming in that for a couple reasons. First off, in the tort world and where the casualty is, we fight most of these fights on state court levels, so you would need to change the laws in Pennsylvania, California, New York and everywhere else. The plaintiff bar is particularly powerful. Chances of getting any meaningful change on a state level, I think, is a little to none.
There has been a fair amount of discussion about the Trump Administration changing some measures that could apply in the federal courts. I think that will play out in a different arena—those may be on jurisdiction and venue. You’ll see them perhaps have an impact on some consumer litigation. There is a lot of litigation suing manufacturers of food about mislabeling, false labeling, slack fill, things like that, so there may be relief there. They don’t tend to be insurance-related issues.
The insurance-related issues are on the state level and I think, if you want to find a clearer sign of what people think about tort reform and rising casually costs, look at the rise of litigation funding. Litigation funding is something that really didn’t exist in the United States many years ago. For those of you who don’t know, it is money provided by private equity that wants to invest in litigation. We have seen it in some of the mass tort litigation, but it is now creeping into bodily injury and property damage cases. They invest in litigation because they can make money on it. This is now a new business. They are backing litigation and that is going to make every case more expensive and harder to settle. It is not in the mainstream yet, but it is clear what the investment community thinks and they think that personal injury litigation is a pretty good investment.
DeFelice: We advise our clients to make sure that they have some sort of punitive damage coverage built in. Sometimes we will also include most favorable jurisdiction wording and the reason behind that is we want to make sure that our insurance provider and a client are in absolute alignment in terms of how they want to proceed with the case. If they fight it and don’t have punitive damage cover and all of a sudden you get a punitive damage award, it creates all kinds of issues for the insured. So we just want to make sure that everyone is in absolute alignment about whether they fight a case or whether they settle.
Barberis: I agree. When I started in this business, plaintiff lawyers pushing punitive damages to the point of collecting on an award were relatively few. I see that trend changing. They are quite a bit more aggressive now. Plaintiff lawyers in some instances will limit themselves to the available coverage and that includes the total tower, but I have seen a shift in that. Now they’re not interested in just insurance money. We have had a couple of cases over the last year where plaintiff lawyers have taken nearly nine figures off of our clients above the tower. Nine figures is an awful lot of money. There is a much more aggressive bar out there and punitive damages is one of the tools in their tool belt.
Gier: Frankly, this is all very depressing. As an OEM, we’re spending billions of dollars on making vehicles safer, whether it be through assisted driving, crash avoidance, lane departure warnings, all these different features, and yet it is being somewhat offset by some of the concerns we’re hearing today. We just have to continue to work on it. The good news is we have seen some decreases in accidents as a result—I drive an SUV that is equipped with all of these safety features and I know they have saved me from a number of potential fender benders or worse—but again, that’s being offset by what we’re hearing in the courts, as well as driver behaviors like texting and distracted driving. If there is any one thing that needs to get fixed, it is distracted driving—93% of accidents are caused by driver inattention, be that texting, eating, kids in the car, what have you. If we change that behavior, this will not only reduce the costs of auto and products liability, but will improve driver safety as well.
Are corporations changing their approach to buying coverage, such as buying higher limits, as a result of these trends?
Gier: We have a very broad umbrella with very high limits already and, at least in the time that I’ve been with the company in this role, we haven’t seen any major verdicts that would test the adequacy of these limits, but we also haven’t reduced our limits either. One of the areas where we have changed our approach is where we have brought down our attachment point on auto liability. That was for a couple of reasons. One is in response to what we see in the size of auto liability verdicts outside our company, and in addition, as we participate more and more in the ride-sharing and gig space where we provide vehicles to the Ubers and Lyfts of the world, we think it’s a bit of the unknown and we want to be prepared.
DeFelice: From a broking perspective, I was on a RFP a couple of months ago for an account that has grown exponentially over the last decade. When we looked at their program, they purchased $30 million in excess limits. I advised them when I was going through the RFP that, whether they bought services from me or from someone else, they should buy more excess limits because, based on some of the verdicts and some of the settlements that we’ve seen out there, they were way under at $30 million.
Cyber liability is a hot topic with manufacturers focused on potential products liability, business interruption and property damage from a cyberattack. How are insurers, brokers and buyers responding?
DeFelice: We try on the casualty side to broaden out the general liability coverage as much as possible. But cyber presses so many different lines of insurance that we have had a small number of insureds that have come to us for a total cyber solution. They don’t want to be pointing fingers at different policies and have insurers point fingers back at them saying this is your responsibility. So we have developed some solutions where a client has all the cyber risks, including some of the product liability risk, built into one policy and then we set their excess policy on top of that.
From the casualty side, I don’t think we have it all completely done yet. We’re trying to push the markets as much as we can. We believe we have the business interruption covered. We believe that we have the direct property damage issue covered. It is the indirect property damage or the loss of use that still is outstanding out there. This takes a coordinated effort between the risk manager and all the various disciplines in order to bring as close to a seamless program as possible.
Gier: Traditionally it’s been more the healthcare industry, financial institutions and educational institutions that bought cyber, not so much the manufacturing side. But our business is changing. We continue to build vehicles, but we call ourselves a personal mobility company and that can take various forms. Now there’s more interconnectivity between ourselves and our customer and ourselves and a vehicle. We see it in four buckets—corporate infrastructure (email systems, etc.), production systems, customer and employee privacy concerns, and finally vehicle cybersecurity. The big one is cyber-related business interruption, which could take down one of our facilities so we’re trying to put all of these buckets together and figure out what a program would look like. Honestly, we haven’t seen anything we like entirely at this point. We take very high retentions generally and if we look at the retentions we take on our property program, for example, we envision a cyber program with similar retentions. We’re still comfortable where we are at this point, but we’re very interested in how the product is evolving.
Barberis: Cyber is an evolving area, but I do think it will be solved. When the environmental crisis hit this country back in the 1980s, the insurance industry took a while, but it did evolve into its own niche industry about what would be covered in terms of casualty or other markets, so I presume the same will occur with cyber. I agree with Tony’s comment that bodily injury and property damage, traditional third-party property damage, is probably within the current general liability form, but most of the losses that we have all heard and read about are not in the bodily injury/property damage world yet. We all talk about people taking over a vehicle or hacking into an insulin pump or pacemaker, but the industry has not seen those losses yet. But like any new technology, there will be hiccups along the way and hiccups will undoubtedly lead to some form of litigation. That is a certainty.
Are there any strategies you are finding helpful for risk managers to implement to reduce the severity of claim trends?
Gier: On the auto liability side, there is a lot that can be done for folks who have to manage a fleet of vehicles. About 15 years ago, we were running pretty high on our auto liability claims, so we put together a cross-functional team involving legal, risk management, HR, our safety team, and a couple of engineers and, as a result, were able to substantially reduce the accident frequency and severity of the fleet. A lot of that had to do with monitoring driver behavior by removing drivers who were convicted of driving under the influence, driving with a suspended license, putting age-usage controls around family members driving vehicles, those types of activities. We saw immediate cost reductions and continue to see them. One would be amazed at the number of really good ideas that come from utilizing a cross-functional group to address these issues. And with more connectivity going forward, there’s a lot of information that can be shared with various fleet managers, so I think this falls squarely in the wheelhouse of the risk manager and he or she can really make an impact.
Barberis: I’ll give you two areas that I think are meaningful and very doable. The first one is when you have an opportunity for loss transfer in terms of a contract or any other written agreement. I can’t tell you how many times one of my clients will be in a position to bargain away some of their loss costs but either they didn’t take the opportunity, or they used language in a contract that is 15 years old and no longer enforceable, or they operated in a state where there are specific requirements and they used language that might not be valid in that particular jurisdiction. Finally, when you do properly transfer your loss costs to a third party, it must be to someone who has sufficient assets in terms of an insurance tower that can satisfy the loss. We see these missed opportunities all the time.
The other area that I think can definitely reduce your loss costs and the overall cost of a claim arises in a negligence case. The standard in a negligence case is, “Did you act reasonably?” In many instances, there will be a disagreement as to what “reasonable behavior” means. When you have manuals, procedures and training materials, you have set the standard for reasonable behavior. If you have these items, you must use them. If you set a standard that you are going to check a vehicle’s brakes every 10 days and you don’t and there is an accident, the plaintiff is going to claim you didn’t check them because you wanted to save money and put profits over safety. Now that’s probably not the case. But you set the standard for what will be judged reasonable conduct, and if some of the standards become antiquated, you need to update them or remove them. It can’t be, “Well we don’t do that anymore, it only applied to something we used to do.” Self-imposed standards must be current, they must be relevant, and you must execute them. That is all within your control.
DeFelice: My strategy is almost a post-claims strategy and that is to make sure that you work in partnership with your insurer. They are not the boogeymen. Talk to your claims people, advise them accordingly and if things start to go sideways, get your broker involved. That is really what our role is. It makes for a smoother transition to resolve claims by keeping the lines of communication open. I would also suggest to the risk managers out there, from a casualty perspective, I think relationship does matter. I know people are sometimes under pressure in terms of pricing, but when you are talking about a long-tail line like a casualty, relationship does matter in terms of the lines of communications that you have, not only with the claims folks from an insurance company, but with the underwriting folks that will support you in that endeavor as well.