NU Online News Service, Dec. 16, 3:32 p.m. EST

The penetration of commercial liability insurance is increasing across all industries on a global basis, but experts fear it is underpriced and insurers need to pay closer attention to the risks, a report from Swiss Re says.

In its latest sigma study, titled "Commercial liability: a challenge for businesses and their insurers," the Zurich-based reinsurer reviews the current state of the commercial liability marketplace and observes some worrisome drivers that could adversely affect insurers down the road.

"After a few profitable years, there is a risk that insurers are again [underpricing] the business," said Thomas Holzheu, one of the report's authors, in a statement.

According to the study, the concern is that insurers, as they price the business, are not taking into consideration the long-tail nature of commercial liability, and that those actions will eventually catch up with them.

"Underreserving, which usually goes along with underpricing, is very dangerous both for insurers' long-term profitability but also for policyholders, since it undermines the sustainability of insurance protection," he noted.

Mr. Holzheu said the current soft market direction cannot continue.

"Commercial liability rates are declining in all markets, especially in the [United States] since 2004," he noted. "Meanwhile, prices continue to fall in all liability lines of business. Because interest rates are low, business cannot be cross-subsidized with investment results; therefore, prices should instead be increasing."

In an interview, Mr. Holzheu explained that the report does not determine the depth of underpricing in the marketplace but notes significant evidence, such as reserve releases and poor industry profitability, as ample evidence that the current underwriting practices cannot be sustained.

He could not say when the current soft market cycle would end but saw the situation as prime for change.

"The pressure to correct prices and profitability is increasing," he explained. "The factors are cumulative. The release of reserves is leading to less of a reserve buffer. Economic pressures remain and there needs to be some corrective action of the industry."

The nature of liability insurance, that it is covering emerging risks, makes for considerable challenge for insurers, the report notes. This requires underwriters to remain vigilant, monitoring trends and drivers of claims costs closely.

Asbestos liability is the major example of how an unforeseen risk can have a significant impact on the insurance industry, the report noted.

"Fortunately, none of these emerging risks has evolved into the next asbestos--yet," observed Roman Lechner, another author of the report.

Mr. Lechner commented on the current changing standards around food safety, environmental pollution, employment practices and the compensation for financial loss.

"The problem is that emerging risks cannot be assessed with traditional actuarial methods. They can only be determined after claims have accumulated following precedence verdicts," he explained.

Added to the pressure on liability insurance is the growing nature of compensation as other nations adopt legal remedies similar to class-action lawsuits common in the United States, the report said.

The demand for commercial liability insurance is clear, according to the report.

In 2008, businesses spent approximately $142 billion on liability insurance on a global basis. Swiss Re said this is about 25 percent of the premium businesses spent on insurance and slightly less than 9 percent of the global non-life market premium volume of $1.6 trillion.

The United States is the primary market for this coverage, generating 54 percent of the premium volume, with the United Kingdom second at less than 12 percent and Germany third at 11.5 percent. Developed countries account for 95 percent of the commercial liability market premium.

The full sigma study is available at www.swissre.com/sigma.

Special Reports /

Swiss Re Calls Commercial Liability Risks Underpriced

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