Liability exposure management and the theory behind quantifying possible risk accumulation is the focus of a newly-published report from Lloyd’s of London.
The historic insurance market partnered with Architects for Risk Identification, Understanding, and Management – aka Arium – an independent company specialising in risk modelling and decision support, to develop the report, which examines the power of supply chain management to understand and quantify liability events.
“Liabilities often stem from a complex interaction of legal and socio-economic factors, which can make this kind of problem hard to represent and the exposures hard to capture in a form that lends itself to systematic study,” comments Lloyd’s.
The report sets out a conceptual framework to assess exposure to liability catastrophes across many lines of business. It suggests a possible approach to defining the spread of potential liability for a harmful product or service through industries with potential exposure, resulting in a map of the event footprint.
Information about the harm caused is combined with policy information to filter and refine this map, which is then used to calculate an aggregate loss for the scenario. To calculate insured losses, the scenario may be split into sub-scenarios, and parameterised to calculate a per policy loss.
“Insurers have historically faced a variety of challenges when attempting to manage liability exposures – including the difficult task of identifying where exposures are likely to accumulate,” said Trevor Maynard, head of exposure management and reinsurance at Lloyd’s.
“The scenarios explored in this report …centre on the mapping of liability against trading relationships while considering the legal system within which the economy functions, and is one example of how this issue can be overcome. As such, this approach is a promising step towards improving insurers’ understanding of emerging liability risks.”
Robin Wilkinson, chief executive (CEO) and founder of Arium added: “Casualty accumulations have lacked a generally accepted modelling methodology, including clarity on how to capture the relevant data. “
The methodology set out in this paper can help underpin a consistent and realistic way of designing exposure scenarios by harnessing supply and distribution chain data as the basic building blocks. This is a first step in helping take liability exposure management down the path taken decades ago in property classes while, given the inherently greater uncertainty with casualty, seeking to incorporate greater transparency and stress testing.”
The full report may be accessed at: www.lloyds.com/designingliabilityscenarios
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