Report: U.S. Litigation Explosion Could Be In Store For Europe

European insurers may expect to see increasing legal defense costs as pressure mounts to allow more securities class actions and other forms of litigation that have proliferated in the United States, a reinsurer reported.

That warning came in the "Casualty Specialty Update" from the London office of Guy Carpenter & Company, LLC, which deals with international casualty insurance developments, including inflationary pressures on indexation clauses in liability reinsurance treaties and the effect of the subprime crisis on European casualty portfolios.

In a statement released with the report, George Carrington, Guy Carpenter managing director, said: "The changing claims environment in Europe and the movement toward American-style class-action litigation are trends that merit particularly close attention. Although the extent to which the industry will have to deal with frivolous claims in Europe is still uncertain, it is safe to say that insurers increasingly will be obliged to defend claims, which will likely result in higher legal defense costs."

The report said that recent developments in European jurisprudence "not only suggest that the doors are open for European investors to participate in (and have the benefit of) U.S. securities class actions, but also that the very beast itself eventually will find its way into the European legal system."

In response to the climate of uncertainty surrounding class-action litigation in Europe, the briefing concludes that both insureds and reinsureds should ensure that they are comfortable with the treatment of loss adjustment expenses within reinsurance agreements.

"On the other hand," added Mr. Carrington, "the commercialization of litigation funding will provide the insurance and reinsurance industry with a mechanism for hedging litigation risk, which should result in a vibrant funding market and competitive legal fees. This could directly benefit the insurance industry."

The update also addresses the influence of inflationary pressures on the indexation clause for complex third-party bodily injury claims, which currently are not reflected in a number of European territories.

The clause adjusts an insurer's retention of risk and the reinsurance limit by an economic activity measure such as the Consumer Price Index.

According to the report, a robust analytical approach and strong technical understanding are required to accurately assess inflationary pressures on the indexation clause.

The report also examines the potential exposure of European casualty insurers to the subprime mortgage market collapse and ensuing credit crunch.

It finds that with the range of related lawsuits continuing to expand beyond financial institutions to other business segments, insurance and reinsurance companies, it is vital that insurers and reinsurers gain a better understanding of the systemic exposures within their portfolios.

Guy Carpenter Managing Director David Lewin said, "Companies are seeking risk management tools that can help them evaluate their exposures in a more systematic way." He added, "Our Casualty Catastrophe Model allows them to assess various liability scenarios and effectively identify aspects of their portfolios that may be impacted by the subprime crisis."

The report is online at www.guycarp.com.