Liability insurance is growing all over the world. In 2008, businesses spent around USD142bn on liability insurance worldwide, around half of which originated in the US.

Importantly, emerging countries’ share is expanding. China generated USD1.2bn in 2008 with its market growing at an annual average rate of 22% per annum since 2000. Other emerging markets grew at an average annual rate of 10% over the same period. Central and Eastern European markets generated an additional USD2bn and have grown at an annual average rate of 19% since 2000.

These numbers come from a Swiss Re sigma study, which warns that there are challenges as well as opportunities in commercial liability insurance. Swiss Re’s researchers are worried that insurers are underpricing and under reserving the business. “Commercial liability rates are declining in all markets especially in the US, since 2004” according to Swiss Re’s Thomas Holzheu. “Because interest rates are low, business cannot be cross subsidized with investment results… prices should instead be increasing.”

Liability business, whether it relates to products, pollution or professional services, is a longtail business. Unlike property insurance it provides broad coverage often with high limits. It is affected by inflation which can send losses soaring.

Also, emerging risks to do with technological and social developments are a constant challenge and insurers have to closely monitor changing standards around food safety, employment practices and financial loss compensation, for example – compensation culture is another growing problem.

The big challenge for insurers (and governments and businesses) is keeping liability risks insurable in this complex environment. It means insurers monitoring drivers of liability claims and building them into actuarial models. But most important, Swiss Re stresses, is maintaining prices that reflect claims trends.

Liability premiums and GDP (USD bn), 2008:
Source: Sigma no. 5/2009

This entry was posted by Garry Booth on Tuesday, December 29th, 2009 at 1:21 pm and is filed under Insurance Commentary.