New Lloyd’s report presents “innovative approach” to reducing dangerous liability risk accumulation

Using big data analytics to improve understanding and reduce the potential for unexpected market shock could help reduce dangerous liability risk accumulation, suggests a new report from Lloyd’s of London, the world’s specialist insurance market.

The report Emerging Liability Risks: Harnessing big data analytics, commissioned by Lloyd’s and released on Thursday, presents an “innovative approach to managing this type of risk,” Lloyd’s said in a statement. Developed by liability catastrophe modelling company Praedicat Inc. in collaboration with Lloyd’s, the report sets out a new methodology, which uses big data to improve insurers’ understanding of liability risk.

“Accumulations of liability risk have the potential to send shockwaves through the insurance industry, and are one of the most complex exposure management challenges faced by insurers,” the report said. “Using new technology to search and mine data from scientific research associated with potential liability risks, this approach estimates the probability of a general consensus being reached that exposure to a substance or product causes a particular form of injury. This is the critical threshold at which lawsuits become more likely to succeed; a liability catastrophe could emerge if a successful lawsuit gains traction and triggers mass litigation.”

The information is then overlaid on an insurer’s portfolio to identify potential accumulations of liability risk. The analysis can be used to develop quantitative estimates of mass litigation, allowing a liability catastrophe model to be built from the “bottom up,” Lloyd’s said.

The approach helps insurers tackle the four key challenges associated with understanding emerging liability risks:

• Identification: recognizing an emerging risk before it manifests as a loss or claim;

• Contextualization: comparing the size of risks, both relative to other emerging risks and to previous risks;

• Projection: converting an emerging risk from the context in which it is identified, such as scientific literature, into an exposure-relevant context, such as companies and portfolios; and

• Quantification: estimating the expected loss from an emerging risk. [click image below to enlarge]

The analysis can be used to develop quantitative estimates of mass litigation, allowing a liability catastrophe model to be built from the “bottom up,” the report said.

The use cases for a scientific-based liability catastrophe model underpinned by big data technologies include underwriting and risk selection, underwriting strategies, accumulation management and reinsurer product development, the report added. “Insurers can use technology to track hundreds of issues, set risk appetites and track accumulations based on granular information about exposures,” the report said. “In turn, reinsurers can offer tailored products to address these accumulations, and both sides of a reinsurance transaction can have greater transparency about the risk. As a result, the risk of liability catastrophe could be spread prudently across the global insurance and reinsurance community.”

The report also shows that big data innovations have the potential to create more robust liability risk management for insurers. Further developments in liability catastrophe modelling using big data could offer insurers a means of managing liability accumulations, while also identifying opportunities to increase exposure to certain risks where the accumulation is consistent with their risk appetite, Lloyd’s said.

“Rapid advancements in big data have opened up a wealth of new opportunities in the understanding of emerging risks,” said Trevor Maynard, head of exposure management at Lloyd’s, in the statement. “One area in particular in which this is creating new possibilities is around the management of liability risk. While the most effective risk transfer is expected to continue to rely on a combination of underwriting expertise and detailed analysis, emerging technologies are offering new insights that we hope will drive further innovation in the insurance industry.”