technical center hot claims topics (c10): casualty as a catastrophe impacted line jason schupp,...

Technical Center

Hot Claims Topics (C10):Casualty as a Catastrophe Impacted Line

Jason Schupp, Director of Regulatory Policy & ProgramsTechnical CenterJune, 2007

Casualty Actuarial Society Spring Meeting

2© Zurich American Insurance Company 2007

Overview of Casualty as Catastrophe Line

• Workers' Compensation

- Earthquake

- Managing the terrorism exposure

- Terrorism insurance market

• Liability

- Liability catastrophe related loss history

- Legislation limiting terrorism liability exposure

- TRIA litigation management, approval and reporting requirements


workers' Compensation and Catastrophes

Actual Events

• Recent earthquake history has produced minimal workers' compensation losses due to the time of day of the events

- Northridge (1994) @ 4:31 am

- Loma Prieta (1989) @ 5:05 pm

• Terrorism has produced significant workers' compensation losses:

- Approximately $2 billion related to the WTC event (2001)

- Minimal from Oklahoma City because most were federal employees

Modeled Workers' Compensation Loss Events

• 1906 San Francisco Earthquake: $11.5 billion - $35.8 billion (RMS)

• 6T truck bomb in NYC: $3.5 billion (AIR)

• 6T truck bomb in Des Moines: $1.5 billion (AIR)


Managing the Terrorism Clash Exposure

Multi-line insurers manage central business district workers' compensation exposure to terrorism in conjunction with property insurance exposures

Red dot indicates site oftruck bomb detonation

Most insurers manage terrorismaccumulations by modeling a5 or 6 ton truck bomb (roughlythe size of a Ryder Truck vanfilled with diesel fuel and fertilizer)

Insurer will manage “total maximumloss” from this assumed event asto not exceed a threshold amount

In this way, workers' compensation and property insurance compete for capacity


The Terrorism Market is Driven By Non-Terrorism Business

Once an insurers has reachedits terrorism exposure threshold,the insurer cannot take onadditional business withoutreinsurance or access to thefederal back-stop

Once an insurer “maxes out”on terrorism exposures in aregion, it also stops writingnon-terrorism exposuresassociated with propertyand workers' compensationrisks

Because TRIA has linked terrorism and non-terrorism coverages, insurers are willing toassume terrorism exposure at a loss in order to secure profitable non-terrorism business

The average workers'compensation terrorism premium is 1.5% of the total policy premium – so that writing terrorism coverage is the cost of writing the other 98% of the policy

Because terrorism and non-terrorism exposures arelinked, failure of the terrorismmarket implies failure of thenon-terrorism market as well

WC structure offers few tools for insurers:• No exclusions• No limitations• No fault benefit


Liability and Catastrophes

• Sept. 11 estimates: $4 billion of non-aviation loss$3.5 billion of aviation liability loss

• In re 9/11 Litigation, 280 F. Supp. 2d 279 (Consolidated Tort Liability Cases):- American Airlines- United Airlines- Port Authority of New York- Port Authority of New Jersey- WTC Properties, LLC- Boeing (manufactured 757 jets)- City of New York (Rescue personnel suing from ailments stemming

from debris and smoke at Ground Zero and Fresh Kills Landfill)

• After initial filings of class actions against oil companies and others as well as isolated insurance agent lawsuits, the 2005 hurricane season has produced modest liability insurance claim activity to date

• Most published actuarial analysis sets catastrophe related liability losses as 10-20% of modeled property plus workers' compensation loss


Legislation Limiting Terrorism Liability

Air Transportation Safety and System Stabilization Act of 2001: Enacted after 9/11 to limit airline liability and to afford an optional compensation mechanism for those injured or killed in the 9/11 attacks (through the Victim’s Compensation Fund)

• Airlines were protected from excess liability• VCF designed to limit tort litigation and afford no-fault benefits to individuals • VCF participants waive right to sue airlines, government agencies or others• Less than 2% of eligible families opted not to use the VCF

Aviation Security Act: Amended the ATSSSA and limited the liability on air carriers, aircraft manufacturers, airport sponsor or persons with any property interest in the WTC to the amount of liability insurance coverage.

Safety Act (Nov. 2002): affords protection and limits liability of sellers and others in the supply chain with goal to encourage businesses to develop and market new anti-terrorism technologies

• Prohibits punitive damages and limits liability for non-economic damage• Federal jurisdiction over lawsuits and caps liability to insurance


TRIA Litigation Management & Claims Reporting

Litigation Management• Creates Federal cause of action for certified acts of terrorism (preempts all state causes of action)

• Treasury requires prior approval for third-party settlements that involve losses that may be part of a claim for reimbursement under the back-stop for:

(1) personal injury or death claims greater than $2 million; or

(2) property damage claims greater than $10 million

• To obtain approval, insurers must provide written notice meeting twelve requirements, which include:

- A statement of policy terms and coverage defenses coupled with an admission of liability under the policy (which appears to ignore that insurers settle disputed coverage claims)

- A statement of the insurer or its attorney supporting the settlement (which appears to require the insurer to justify the claimant’s disputed claims)

- The intended use by the claimant of settlement proceeds with regard to payment of its attorneys and other expenses (information likely unavailable to the insurer)

(source: 31 CFR 50.83(d)(1)-(12))• ALAE is part of “insured losses”, although underlying punitive damages and insurer extra-contractual are not

Claims Reporting Requirements• Initial Reporting:

- Insurer must file notice within a Program Year if losses expected to exceed 50% of deductible- Initial Report must include:

Estimated incurred aggregated insured losses Estimated insurer deductible Estimated federal share of compensation Contact information

• Initial Certification: Bordereau format – required within 45 days after the last day of the month once an insurer paid an amount that exceeded its deductible:

- Cat code- Line of business of policy by NAIC line- Location of loss- Date of loss- Insurer NAIC number- Claim number- Insured name- Effective and expiration date of policy- Loss payment (current and historical)- ALAE paid- Punitive damages paid- Salvage and subrogation recoveries- Reinsurance recoverable- Other federal benefit information- Claim status- Reserves


Questions / Discussion

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