Casualty Named Peril: The Next Bermuda?

In 1985, when a litigation crisis made it hard for large U.S. companies to find coverage, Bermuda excess casualty insurers ACE and XL launched in response.

Largely caused by cancer claims involving asbestos, a 19th-century industrial innovation with applications ranging from insulation to textiles, this product liability crisis ultimately reached US$100 billion, the largest loss in property and casualty (P&C) history.

ACE and XL’s new excess casualty coverage struck a balance, limiting the worst losses for insurers while providing large limits to its Fortune 1000 buyers. It was innovative in many ways, from the location of the companies that offered it to the modified occurrence trigger.

These innovations launched a new casualty market and arguably even the entire Bermuda insurance industry. This was also perhaps the last major innovation in commercial casualty insurance.

The 20th century brought other new products that raised concerns among scientists about causing bodily injury, such as glyphosate-based herbicides, per- and polyfluoroalkyl substances (PFAS), opioids, and chemical hair relaxers. This has led to a new wave of product litigation in recent years that rivals, and for some products may surpass, the scale of asbestos claims.

What was once considered “once-in-a-generation" litigation is becoming more frequent, with a corresponding increase in claims against casualty insurance. Is Bermuda excess casualty coverage up to the challenge?

I recently spoke to a Fortune 1000 Risk Manager who had her doubts. In today’s social inflation and litigation finance environment, she expected that over the next 20 years, product liability would be her company’s top risk. At the same time, her insured limits have shrunk, the total premiums were higher, and when she recently had a claim, the coverage was disputed, and she settled for a fraction of her limit. She complained she was paying more and had no coverage certainty.

Meanwhile, when I speak to underwriters and their reinsurers, they describe increases in losses that are outstripping increases in premiums, and reserve restatements have become more frequent.

Neither side is delighted. The casualty market is ready for the next innovation in coverage. What might it be?

 

All-perils coverage

One idea is to reconsider “all-perils” coverage. Casualty coverage is generally written to cover all perils that fit the definition of a specific set of harms to the plaintiff, such as bodily injury or property damage, unless a specific peril is excluded. The all-perils aspect is certainly a feature for the buyer, and brokers fiercely guard against the imposition of additional exclusions.

When the type of risk and its loss history are knowable in advance, such as if a train derails or a refinery explodes, and where the number of defendants in an incident is small, underwriters are comfortable.

The problem is that insurers are increasingly covering emerging risks, which, by definition, have no history to rely on for underwriting and pricing. Furthermore, risks like PFAS, opioids, and hair relaxers have dozens of defendants, which, if allowed to accumulate in an insurer’s portfolio, can lead to insolvency.

In a world of increasing exposure to emerging risk events and with all-perils coverage, underwriters tend to offer less coverage and want to charge extra to cover the “unknown-unknown” uncertainty. The result is what we see today: increasing premiums and shrinking coverage in the face of growing risk. This is not a formula for a healthy market.

To the extent that a set of emerging risks can be identified in advance, the best way to cover them is as named perils. The analog to this for property insurance would be natural catastrophe coverage, such as earthquake or hurricane. Offering natural catastrophe coverage as a named peril allows insurers to control their overall exposure and price appropriately.

The key to named peril for casualty is the ability to name the emerging risks and quantify their potential losses. At Moody’s, we’ve developed an AI tool that identifies emerging risks from scientific literature when the literature is new and too small to support litigation. We have created a database of risks identified by scientists as potential causes of bodily injury, property damage, or environmental damage. In other words, risks that might lead to casualty insurance claims.

We generate estimates of the size and probability of litigation for each risk, which we update frequently as new science is published. The risks are very diverse, from chemicals to addictive software, ultra-processed foods, and industrial meat farming. This technology creates a catalog of potential named perils to inform the development of a new kind of casualty coverage.

 

Developing a new kind of casualty coverage

How would the emerging risk catalog be used to create a new product? Let’s suppose a chemical company had twenty chemical products in its catalog; it is then highly likely that these are the company’s largest emerging risks. These chemicals could be assembled into a named peril tower. The tower might have a higher retention and higher limit and be claims-made.

Alongside a named peril tower, the risk manager could buy a traditional all-perils tower with an occurrence trigger and the 20 chemicals excluded. The all-perils tower would now be significantly de-risked and may not need as much limit.

Interestingly, with today’s all-perils cover, an insurer would write all the risks in both towers. With this new approach, some might write both, but some would prefer writing a de-risked all-perils tower, and others would write the named-perils tower.

With the largest risks covered in the named peril tower, the risk manager would have the limit she wants with significantly greater coverage certainty, while not giving up the security of the all-perils in the other tower. The insurer would be able to price the risk and manage the accumulation. It might be that the right balance is struck to make a new market.

Forty years ago, in 1985, the creation of XL and ACE solved a critical risk problem for Fortune 1000 companies and created an enormous growth opportunity for insurers. While exclusions shrink markets, the best solutions grow markets. Named peril is hopefully that kind of solution.

We’ve started sharing the idea of named peril excess casualty coverage with brokers, risk managers, and insurers, and the response has been favorable.

One risk manager said, “I love this idea – it could be the next Bermuda!” That’s what I’m talking about! What do you think?

Find out more about Moody's casualty risk solutions here.