To say the effects of the COVID-19 pandemic continue to be felt would be an understatement. From health and wellbeing to travel, economics, the supply chain and more, we’re still in the midst of understanding the far reach of this global disruption.

In the insurance world, one of the biggest casualty trends we see is the increased emergence of long-tail claims following this pandemic.

“It began at the end of 2022 into 2023, but Munich Re US, for example, has really started to see a higher volume of claims submissions,” said Maura Freiwald, head of casualty, Munich Re US.

“Utilizing our expert resources to constantly monitor our portfolios, and new developments, we compared received submission from the first half of- 2022 to those same accounts in the first half- 2023 to understand the emergence,” said Freiwald. “Our analysis showed that on average the total incurred YOY went up by 31%. This is significantly higher than what we were expecting driven by new losses and development of existing losses.”

This analysis highlighted the fact that the emergence is not just for the latest years but in some instance it dates back to policies as far back as 2012.

It’s not just COVID that’s contributing to this spike, she said, although it has definitely played a role: “It’s part of the COVID catch-up, because the courts were closed. But there’s also this question mark around, are more claims coming in that we just didn’t know about? Or perhaps, they’re coming in at higher volumes than we anticipated.”

Whatever the case may be, long-tail claims are making their way into the courts, and the need for casualty solutions to manage them is paramount. As the trend continues upward, here are several things that underwriters need to keep in mind — including what to look for in a partner when it comes to addressing these types of claims.

What’s Happening in the Courts

Maura Freiwald, Head of Casualty, Munich Re US

Long-tail claims, those claims settling well after the insurance policy has closed, have always held a place of concern for the industry, but never has the situation been as pressing as it is now.

The court closures during the height of the pandemic have led to a certain level of “catch-up” after the fact. However, there’s more to the courtroom story than COVID.

“There are other influences in the court system,” Freiwald said. “Legal system abuse, such as litigation funding, lawyer advertising, and the general attitude of our jury system are all contributing to this increased emergence of long-tail claims.”

“Nuclear Verdicts” are another area of concern. Plaintiffs are able to tap into a jury’s sense of injustice to drive higher payouts.

“The value of claims has shot up, because the value is influenced by other large verdicts. What used to be an average $250,000 payout has now become an average multimillion-dollar settlement,” Spivey shared.

Another trend of note is the extension of reviver statutes, which have extended the statute of limitations window for reporting and enabled people to make claims long after an alleged incidence or accident occurred.

Another detriment is the lag time between claims made and when the reinsurer is notified.

“What happens, very often, is that the ceding company will receive a loss that doesn’t appear like it will have damages that will penetrate the excess layers with its reinsurer, so the reinsurer won’t be notified,” explained Leah Spivey, chief claims officer, reinsurance North America, Munich Re US.

“But then, the company receives an adverse verdict, where they are penetrating the excess layer. The reinsurer is now involved. This causes a lag between the initial claim being made and the reinsurer being involved.”

The culmination of these trends is leaving companies in the lurch, wondering how they can start to get a handle on managing these claims. Luckily, a good reinsurer is equipped with the knowledge necessary to not only address long-tail claims as they arise, but also help guide insurers through the process.

Best Practices

Leah Spivey, Chief Claims Officer, Reinsurance North America, Munich Re US

It’s hard to predict in advance what could potentially become a long-tail claim. As Freiwald put it, “It’s hard to predict the unknowns, and how to underwrite to account for these unknowns.”

But there are some best practices that can be put into place in advance. Perhaps the best course of action both Freiwald and Spivey agreed on is communication. When a claim is made, ceding companies are best served when they alert their reinsurers as soon as possible.

“It is important for the reinsurer to understand how the insurer is handling its claims,” Freiwald said. She also said that when beginning a relationship with a reinsurer, communicating openly about the number of open and closed claims will go a long way in building a solid relationship. “The open-and-closed-claim triangle enables the reinsurer to see and understand their claims history. That contributes to how analyses are conducted when it comes to the pricing. Sharing that data helps the reinsurer get a better comfort level,” she said.

Transparency is key.

“Whenever we’re speaking with clients, we talk about the importance of transparency, because the sooner the reinsurer knows about something, the better prepared we can be financially to support them through a potential long-tail claim,” Spivey said. Transparency between reinsurance partners is also essential to stay ahead of the trends, respond to the surprises we know will come, and set adequate rates.

Underwriting discipline, proactive claims handling, limit management and risk adequate pricing are things insurers can do to help mitigate and manage emerging long-tail claims trends. More detailed data on current exposures and past liabilities, including, but not limited to, viewing prior data through a new inflationary lens, is an essential best practice.

Moreover, insurers should have an action plan in place for when a claim develops.

“When a claim gets reported, the reinsurer won’t have much control over it. But we’ll want to know that the insurer is on top of it. We’ll want to see a proactive approach to how they are managing these claims,” Spivey said.

In addition, claims-handling plans should be discussed with each partner in the portfolio. The legwork up front will contribute to a better overall relationship between underwriters and their reinsurers.

The industry needs to be more diligent and transparent about what is happening in underlying portfolios, litigation trends, and legislative developments. Moreover, critical changes in rate adequacy and tort reform are needed moving forward to reign in these long-tail claims.

The Value Munich Re US Brings

When partnering with a reinsurer, it’s good practice to make sure the right people are on the job.

“The expertise being brought to the table plays a big role in managing these long-tail claims,” said Freiwald.

Tenured, experienced underwriters have a pulse on day-to-day trends. They know how hot-button issues like sexual abuse and molestation claims or long-haul trucking claims are perceived in court and affect business. At Munich Re US, the team’s long-standing expertise is an asset to any partner.

“We have been involved in this space for long time, and we have firsthand experience. We have skin in the game,” Freiwald said.

“Not only have we dealt with this from the underwriting perspective, but also from the claims perspective,” Spivey added. “There’s longevity behind us, but also security.

“Our ceding companies know that, in 100 years, we’re going to be here to pay these long-tail claims that may be developing now, even if we don’t quite know what they are yet,” she said.

When it comes to claims services, Munich Re US provides expert consultation and a compendium of case law experience for addressing longtail claims issues.

To learn more about Munich Re US’ casualty solutions and their value-added claims services, please visit: https://www.munichre.com/us-non-life/en.html.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Munich Re US. The editorial staff of Risk & Insurance had no role in its preparation.