SA3- Latent claims

Latent claims

Overview

Examples

  • Vibration white finger
  • Pharmacological treatments with side effects
  • Environmental pollution clean up costs
  • Sexual abuse claims

Potential stage
Early in development of the claims. May be able to infer liability estimates based on size of historical latent claims. Liability may not have been demonstrated and insurers may have a number of legal defences

Emerging stage
Legal liability better established and better info. There are two broad methods to estimate quantum of liability


Credibility of estimate may be impaired by:

  • changes to legal environment
  • incomplete policy records
  • changing propensity to claim (as claimants become more aware of legal rights)
  • industry being covered e.g. pharmaceutical industry more likely to give rise to latent claims
  • territory

Top down
Aim to produce global estimate of the liability to industry. Then estimate proportion attributable to insurer using policy terms, excesses and limits and market share

Bottom up
Review policies written by insurer. Estimate liability by each insured. Allocate to proportion of coverage provided by insurer. Need to make assumptions about the manner in which the claims will be allocated

Defined as claims arising from a risk not specifically allowed for by the UW when selling the original policy. But also used to describe claims where there is a long delay between original exposure and the manifestation of the claim


Latency period- avg time between original exposure and the subsequent manifestation.

Emerging Risks

Examples

Asbestos
Fibrous substance that occurs naturally. Easily breathed


Still heavily used in developing world.


Once inhaled not readily expelled by the body. Asbestosis- scarring of lung tissue
Mesothelioma- cancer which could be could be caused by single asbestos fibre. Compensation awards very high for this


Often difficult to pin down who to blame. The victim will have number of companies they can try to sue

Pollution
Introduction of contaminants that cause instability, harm or discomfort to the environment. As science has developed more damage has come to light.
Predictable pollution is not insurable as 'known loss'


  • long reporting delays
  • clean up costs very high
  • legal suits typically brought against biggest polluter who then pursues recoveries from other polluters
  • landmark legal warning can have a significant effect

Health hazards
Wide range of dangers.
Diseases associated with coal mining
Some health hazards may have been intended to be covered from the outset e.g. public liability cover to drug companies

Dealing with latent claims

Reserving
Methods:

  • apply simple multiplier
  • use benchmark
  • frequency/severity approach
  • top-down or bottom up approaches

Possible future claims
Always need to consider impact- can never be written off entirely

  • electromagnetic fields e.g. living near power lines
  • nanotechnology- as used in suncream
  • climate change
  • lifestyle risk- obesity and alcoholism
  • noise
  • mobile phones
  • pesticide

With exclusions and instructive advice already in place it might be that future losses come from legal battles.

Modelling uncertainty

Need to quantify uncertainty for:

  • reserve ranges for management info
  • calculating risk margin
  • for use in capital model
  • RI planning
  • pricing
  • M&A
  • ALM

Could use stochastic or deterministic approach. Depends on:

  • purpose
  • availability of data- for emerging claims there will be more
  • stage of claims development
  • materiality of the exposure
  • cost of developing the model

Emerging risk can be seen as a risk which has not yet become apparent or prominent or not yet fully understood. Could be due to a number of reasons:

  • may not know about the existence of the risk e.g. health implications of vaping
  • may not yet understand the potential impact of the risk e.g. autonomous cars
  • may not yet be able to accurately and reliably quantify the impact e.g. cyber risk
  • risks which was previously well understood but is now changing e.g. climate change