Your Next Catastrophic Risk? Hint: It Has Nothing to Do With Climate Change

Amped-up settlements and jury awards are creating upward pressure on the global liability market, while new technology offers an opportunity for insurers to be more proactive.
By: | May 7, 2019

Across industries and across business lines, the liability landscape is in a state of flux.

Advertisement




The plight of PG&E after last year’s catastrophic wildfires highlights concerns about wildfire liability claims going forward. Traumatic brain injury claims are cropping up earlier and are a growing issue for automotive and general liability lines. Practically any entity that touches opioids could be ensnared in the effort to shift liability for the opioid crisis onto the broader health care industry.

These issues and so many more are occupying the headspace of carrier and brokerage executives, especially in light of the environment inside U.S. courtrooms right now, where 8-, 9- or even 10-figure liability verdicts are no longer unheard of.

“You’re seeing billions and billions of market value knocked out of companies as a result of even just one verdict,” said Randy Nornes, executive vice president, Aon Risk Solutions.

Experts say that while extreme settlements are par for the course for class-action suits, it’s the large-award single-plaintiff cases that have been a growing source of concern during the past decade or so, as more claims exceed retentions and dig far into policy limits.

“As the severity of claims have increased over the last few years we have adjusted our underwriting appetite and pricing for this new reality,”  said Jeff Summerville, head of casualty, financial & professional lines North America, Swiss Re Corporate Solutions.

Randy Nornes, executive vice president, Aon Risk Solutions

Automotive product liability and product defect/recall are key drivers for large liability claims globally. So is the beleaguered pharmaceutical industry, which struggles to combat the automatic assumption of liability in disease-related cases.

“If we understood all the science behind every disease, I think we’d be in a different place. But there’s not really hard science around what causes disease and what is the role of genetics versus environment. There are so many elements that [causation is] not really settled but it’s [being presented to a jury as if it was] settled,” said Nornes.

In 2017, a jury awarded Eva Echeverria $417 million in one of numerous ovarian cancer-talc lawsuits against Johnson & Johnson. The award was reversed a few months later by an appeals court judge. Attorneys for Echeverria’s estate are working to reinstate the original verdict.

In another talc case decided in 2017, Lois Slemp was awarded $110.4 million — most of it in punitive damages. In November, the court upheld the ruling.

In a Monsanto weed-killer-cancer case decided in August 2018, a jury awarded a single plaintiff $289 million — $250 million of which was punitive. The award was later reduced to $78.5 million.

“Just five years ago, our expectation for worst-case single plaintiff liability claims was around $25 million. Recently we’ve observed these same types of claims exceeding $50 million. Some juries award extreme damages out of sympathy for the plaintiff, regardless of whether there was actual negligence.”

Summerville cited the example of a recent verdict awarded to a family when two children in the backseat of a sedan were injured when the car was rear-ended by another vehicle.  Although the manufacturer argued that the car driven by the plaintiffs performed exactly as it should have in such circumstances, the jury returned a verdict in excess of $200 million, more than half of which was in the form of punitive damages.

“While that figure may be reduced on appeal, in my opinion, that is an extreme award for this case,” said Summerville. “No matter how well a car is designed, collisions at high-speeds can lead to serious injuries. It does not mean there was necessarily any negligence by the manufacturer.”

How Did We Get Here? Let’s Start With the Lawyers

Law firms have become adept at advertising and marketing and using social media. The U.S. Chamber of Commerce estimates that law firms spent nearly $1 billion on ads in 2017 — about 116 percent more than 2006 spending.

With plenty of cases to choose from, they’re also more selective, focusing on the cases with the most drama and the most potential for high jury awards.

“As the severity of claims have increased over the last few years we have adjusted our underwriting appetite and pricing for this new reality.” — Jeff Summerville, head of casualty, financial & professional lines North America, Swiss Re Corporate Solutions

And when they do find cases worth pursuing, they’re better equipped to fund their endeavors. Litigation finance — where outside investors front legal fees in exchange for a cut of potential settlements or judgments — is big business. Its use by American law firms quadrupled between 2013 and 2016. And it’s still spreading.

In an October 2018 study published by Burford Capital, 70 percent of law firms surveyed that had not yet used litigation funding reported they were likely to start within the next two years.

“Plaintiffs’ attorneys are just getting better at bringing these cases, and they’re successful at getting larger settlements and jury verdicts,” said Summerville.

“These plaintiffs’ attorneys see what each other are doing. … Once the claim gets to a certain number, that becomes their benchmark for that type of claim.

“They think, ‘well, case XYZ settled for $50 million dollars. The facts of this case are similar to that one. So this should be $50 million dollars as well.’ We see that across the board.”

David Versus Goliath

At the same time law firms have been perfecting their strategies, a perfect storm of social and political changes are impacting the potential jury pool — AKA the public.

In the years following the financial crisis of 2008, the ranks of the disenfranchised swelled, giving rise to the Occupy Movement and chants of “We are the 99 percent.” The movement imploded before long, but negative public sentiment lingered, reinforced by copious media coverage of every messy corporate scandal from Takata to Theranos to Wells Fargo.

Advertisement




“So [the assumption is that] all these people are making money left and right and just basically gouging the consumers. That’s the general perception,” said Thai Hong, vice president of risk management with CBIZ Insurance Services.

“Then it feeds into the fire of, ‘Yeah, you’re an evil empire, so let’s stick it to you.’ That’s where a lot of these verdicts are coming from, because it’s not about that particular claim at all. It’s about the general feeling of corporate malfeasance or corporate greed and now we can punish them.”

Said Summerville, “Many of these cases are settled before they go to a jury trial. But the plaintiffs’ attorneys certainly know they have the threat of a jury trial to influence how much of a settlement they demand. Insurance companies and defendants — a majority of the time — don’t want to go to a jury because of the capriciousness of jury decisions.”

Carriers Are Making Moves

“[Carriers are] paying a lot closer attention to the capacity that they’re putting out on any individual risk,” said Jesse Paulson, Marsh U.S. excess casualty leader.

“They’re looking at rate. They’re looking at capacity deployed, and they’re looking at attachments way more closely than they would have several years ago.”

Paulson said these concerns are evident in the moves carriers are making right now.

“Some of them are being quieter than others, but they are making significant changes aimed at right-sizing that book of business.”

Added Summerville, “The market is moving upward when it comes to both terms and premiums right now, especially for insureds that present a challenging risk profile. But not dramatically. And not to the degree we feel it should be.”

Insurers do have new tools at their disposal to help manage their liability risk and develop new products around emerging concerns.

Insurtech analytics firm Praedicat uses algorithmic search, machine learning and natural language processing to extract insights from vast troves of peer-reviewed science to identify and quantify risks as they emerge, in effect bringing CAT modelling to the liability market.

Praedicat, born from an R&D project aimed at identifying the next asbestos, is working with insurers to help control their total aggregate exposure, limit exclusions and manage their portfolios. In essence, it turns emerging risks into named perils that can be quantified and reinsured, benefitting insurers and insureds alike.

Jeff Summerville, head of casualty, financial & professional lines North America, Swiss Re Corporate Solutions

Explained on the firm’s website: “Like a flood map, the casualty catastrophe map shows which products and practices are exposed to a potential ‘flood’ of litigation.”

One product the firm’s analysis has identified is DEHP, a chemical used widely in plastics. Scientific studies have connected DEHP with a variety of health risks, from autism to ADHD to obesity. Praedicat estimates the chemical could result in a loss for the industry of $117 billion.

As such sources of liability intelligence continue to evolve, insureds should continue to expect the unexpected and have a solid litigation response plan at the ready — a plan that involves leveraging your carrier’s expertise, said Summerville.

“We look for insureds who seek to partner with us on claims. When a claim does come in, they notify us early and ask us to  participate in the litigation strategy for the claim. Our evidence is that the claim outcomes are almost always better when we have such a partnership.,” he said.

“That may seem obvious, but it does not always work that way. Some insureds would prefer to handle the claim without our assistance and then just seek reimbursement from us after the litigation is concluded.  That is not what we expect. Given our experience handling many of these claims, we believe we can add value and help create a strategy to mitigate the severity of the claim.

“It doesn’t always mean settling; it doesn’t always mean fighting either,” Summerville said.

“It means coming up with a strategy for whether to take the case to trial or whether to settle it, and at what level to settle.”

Corporate Citizenship Matters … to a Point

Companies that have carefully managed their brand identity and reputation may have a degree of protection in the event their actions come under the scrutiny of a jury. But reputation is no guarantee of vindication, experts said.

Advertisement




“A lot of companies right now spend a lot of time and effort trying to manage their brand and their corporate reputation in terms of how they treat their consumers or the communities in which they work or their employees,” said Paulson. “And I think all of those things do pay dividends.

“Unfortunately, I feel like we’re at a time right now where that may not be enough,” he added, “because at the end of the day, when there’s a large suit and a smart, well-funded plaintiffs’ attorney, there will be a story told to a jury around how [the company] didn’t do the right thing — even if they did.

“The dollar amounts are becoming so much more significant that people really need to sit up and pay attention.

“And you’re seeing people do that — certainly on our side. But our clients and the insurance markets, the way that they’re reacting as well, it gives you an indication that they are taking this very seriously. At the end of the day, they’re the ones who are writing the checks,” Paulson said. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

Advertisement




Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

Advertisement




We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

Advertisement




Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

Advertisement




Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

Advertisement




More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]