Emerging issues occur far more frequently than “black swans” and include more than just “casualty catastrophes.” Still, such issues have, and will continue to, cost the property/casualty insurance industry billions of dollars in unexpected claims.
Executive SummaryThe data-driven property/casualty insurance industry is often slow to react to emerging issues until potential costs start showing up in loss data. That means they may not be considered when underwriting or pricing risk, observes veteran risk watcher Charlie Kingdollar. Here, he provides examples of emerging issues arising from new products, law changes and advances in technology.
Insurers and reinsurers face numerous emerging issues arising from: the rapid pace of scientific, technological and medical advances; new products; changing social mores; court decisions abrogating various insurance policy defenses; as well as new and amended laws and regulations. The industry, which is so heavily data driven, is often slow to react to emerging issues because the potential costs have yet to show up in loss data. That means they may not be considered when underwriting or pricing risk.
Some emerging issues involve the potential for latent illness that may take decades to develop. Given that most insurance policies are written on an occurrence basis, there is a potential for limits stacking over policy years in several jurisdictions.
Over the past few years we’ve seen several emerging issues, well, emerge. These include the herbicide glyphosate, opioids and talc (sometimes together referred to as GOT). All have been in use for decades. Thousands of plaintiffs have filed lawsuits. In the case of opioids, cities, states and healthcare systems have also filed suits. Litigation has already begun for these issues and several multimillion-dollar verdicts have been handed down. Each of these emerging issues could result in billions of dollars in defense and indemnity costs. It seems doubtful that even a few years ago, let alone decades ago, underwriters providing coverage for the defendants involved would have priced for such potential claims activity.
Of course, these three aren’t the only potentially significant emerging issues facing insurers and reinsurers.
Retailers at Risk: Hidden Vaping Exposures for Insurers
Several emerging issues have come from new products. E-cigarettes are one example.
E-cigarettes were invented in China in 2003 and hit the U.S. marketplace three or four years later. In 2015, an American e-cigarette maker, Juul, began operations and subsequently captured roughly 70 percent of the U.S. e-cigarette marketplace. Millions of adults as well as millions of high school and middle school children currently use e-cigarettes.
In August 2019, the U.S. Centers for Disease Control and Prevention (CDC) recognized a new vaping-related illness, called EVALI (E-cigarette or Vaping Product Use-Associated Lung Injury), which has, as of Dec. 31, 2019, killed 55 and hospitalized over 2,500 others nationwide. Many of those sickened have been hospitalized more than once and may face a lifetime of serious respiratory effects. Many of the victims had vaped THC (tetrahydrocannabinol, a high-inducing chemical derived from marijuana), but some 13 percent of those who contracted EVALI reportedly only vaped tobacco products. The CDC has yet to determine what ingredient or ingredients may be causing the respiratory illness. One suspected ingredient is vitamin E oil, but the CDC has stressed that there could be multiple vaping ingredients involved.
While EVALI manifested relatively quickly, perhaps more worrying is that use of e-cigarettes and vaping fluids may also result in latent illnesses that could affect far more people than EVALI and take decades more to manifest.
Recently, another illness has been linked to e-cigarettes: a form of lung scarring called hard-metal pneumoconiosis, which is usually associated with people who work with hard metals. Researchers believe the metals are coming from the heating coils found in vaping devices. Hard-metal pneumoconiosis causes irreparable damage, lung scarring, persistent coughing and breathing issues.
In addition, researchers from Harvard T.H. Chan School of Public Health have found that 46 percent of Juul products were contaminated with a microbial toxin, glucan, that can cause long-term lung damage. Two flavors in particular—tobacco and menthol—were much more contaminated with glucan than other flavors. Researchers noted that the glucan found in Juul pods is not related to EVALI. (Source: “Glucan, a microbial toxin, found in Juul’s nicotine vaping liquids,” hsph.harvard.edu, Jan. 2, 2020) Glucan poses more of a latent illness exposure.
Juul is already being sued by families of those who contracted EVALI and has also been sued by several states including California, Illinois, Massachusetts, Minnesota, New York, North Carolina and Washington for deceptive marketing, creating a public nuisance and for injuries to people.
Any U.S. tort litigation may not be able to reach foreign manufacturers of e-cigarettes and vaping fluids. Litigation may force U.S. makers into bankruptcy. If so, which U.S. entities will be left in the liability chain? Distributors and retailers.
Estimates of the number of vape shops in the U.S. vary, with some coming in as high as 35,000 five years ago, although the current count has come down to around 12,000-15,000 (according to the executive director of the Smoke Free Alternatives Trade Association contacted by CM). But e-cigarettes and vaping fluids are sold by many other types of retailers. I’ve even seen them for sale in car washes. I doubt many insurers even ask an application question addressing whether a retail risk sells e-cigarettes or vaping fluids.
Consider the following: millions of possible plaintiffs, including millions of children; serious, even fatal illnesses being linked to product use; thousands of potential defendants; and the potential for limits stacking over years of exposure possible in multiple jurisdictions. Throw in ongoing social inflation of verdicts and settlements (which will impact many emerging issues), and you certainly have the making of a potentially significant emerging issue.
Lawsuit Lookback Windows for Abuse
Emerging issues can also arise out of new or changing laws or regulations. States that are extending or suspending their statutes of limitations or creating “lookback laws” for sexual abuse and molestation lawsuits are one example.
I have yet to see an estimate of what sexual molestation claims have cost insurers and reinsurers. According to one recent Associated Press article, $4 billion has been paid out since the clergy sex abuse first came to light in the 1980s. It is unclear how much of that $4 billion was paid by insurers and reinsurers. That $4 billion figure also does not include other entities that have been named as defendants in sexual molestation litigation (i.e., public schools, colleges and universities, the Boy Scouts of America).
One thing is certain, as states move to amend their statutes of limitations to allow more time for victims of sexual molestation to file lawsuits, the costs to insureds, insurers and reinsurers will likely increase substantially. As of early December last year, seven states—Alabama, Connecticut, Michigan, Pennsylvania, Rhode Island, Tennessee and Texas—and the District of Columbia have amended their statutes of limitations to give alleged victims more time to sue. Eight others—Arizona, California, Hawaii, Montana, New Jersey, New York, North Carolina and Vermont—have created even more broad “lookback windows,” which allow alleged victims to file suit no matter how long ago the alleged abuse took place. (See “How Sex Abuse Claims Laws Have Changed in 15 States,” Insurance Journal/Associated Press, for details.)
According to the Associated Press, the wave of new “suits could surpass anything the nation’s clergy sexual abuse crisis has seen before, with potentially more than 5,000 new cases” and verdicts and settlements totaling more than another $4 billion. (“Surge of new abuse claims threatens church like never before,” AP News, Dec. 1, 2019)
Obviously, any impact on the P/C industry could be multiplied should additional states similarly amend their laws. I suspect at least some will.
Like with e-cigarettes and vaping, there could be the potential for limits stacking in some jurisdictions. However, unlike e-cigarettes and vaping, this emerging issue could impact policies that go back much further than just the past 12 years.
Some more recent, but not all, CGL policies contain abuse molestation exclusions—and the language used in these exclusions may vary. Some insurers may be relying on their policy’s intentional acts exclusion as a defense against molestation claims. Insurers will have to monitor how the defense holds up in these jurisdictions.
Advancing Tech Fuels Emerging Issues
Advances in technology also can create emerging issues—and there’s no better example than autonomous vehicles.
While the previous two emerging issues discussed involve litigation for injuries sustained, autonomous vehicles hold the promise to reduce accidents, injuries and deaths—so possibly resulting in far less claims activity. But let’s start with this: Personal and commercial auto liability premium makes up nearly half of the U.S. P/C industry’s premium. Throw in personal umbrella premium, which is largely driven by auto claims, and you’re right about at half.
According to the National Highway Traffic Safety Administration (NHTSA), 94 percent of vehicle accidents are caused by human error. (Source: “The National Motor Vehicle Crash Causation Survey” conducted 2005-2007, NHTSA Safety Facts, February 2015) Of course, accidents drive rate. Autonomous vehicles will not eliminate all accidents, but it seems reasonable to assume that at some point they will cause fewer accidents than humans—perhaps much fewer.
In addition, some believe autonomous vehicles will dramatically reduce the costs of ridesharing and as such will reduce the need to own a personal vehicle. This would seem more likely to happen in cities but keep in mind that more people are moving to cities—a trend some believe will continue. Companies like Uber, Lyft and even traditional car manufacturers—who now, in some cases, want to be called “transportation companies”—are working to develop autonomous taxis.
Autonomous trucks, including tractor-trailers, may make inroads before autonomous taxis or autonomous private passenger cars. This makes some sense given the year-after-year shortage of qualified truck drivers.
There are those who believe that any impact from autonomous vehicles is still far in the future, and certainly some predictions of their early arrival have missed the mark, but let’s examine just a few examples of where we are as of today:
- In October 2019, Waymo began offering fully automated rides, without human attendants in the vehicle, to hundreds of users of its robo-taxi service in Phoenix, Ariz. (Source: “Autonomous Deliveries Will Likely Catch on Before Taxis, Says Waymo CEO,” IJ/Reuters, Oct. 29, 2019) The driverless service now has over 1,500 monthly active riders. (Source: Waymo press release, “Waymo One: A year of firsts,” Dec. 5, 2019)
- On Dec. 11, 2019, Plus.ai announced that its autonomous semi-truck successfully delivered 40,000 pounds of butter, driving over 2,800 miles in three days from Tulare, Calif. to Quakertown, Pa. (Source: Plus.ai press release, “Plus.ai Completes First Cross-Country Commercial Freight Run by a Self-Driving Truck in Record Three Days“) “While there was a safety driver and engineer on board to observe the truck’s behavior and intervene if necessary, the truck made its trip with zero disengagements, meaning that a human never took over for safety purposes.” Perhaps more importantly, the company states that “it has been running freight trips every week for about a year now, though the cross-country mission is the first instance that it has publicized.” (Source: “Self-driving truck completes first cross-country freight delivery,” mic.com, Dec. 11, 2019)
- In December 2019, Walmart announced it has partnered with Nuro to start testing Nuro’s self-driving grocery delivery vehicles in Houston, Texas. (Source: Walmart press release, “Walmart to Test-Drive Autonomous Grocery Deliveries with Nuro, Dec. 10, 2019; “Why Nuro and Walmart Have Teamed Up: Bringing Autonomous Grocery Delivery Into 2020,” medium. com) Nuro has previously partnered with other companies to also provide driverless grocery deliveries.
- On Dec. 17, 2019 California took a major step toward the commercialization of autonomous vehicles by approving them for light-duty use on public roads. This will pave the way for companies to use autonomous vehicles to deliver goods. The California Department of Motor Vehicles will set up a permitting process for companies wishing to deploy light-duty autonomous vehicles. In addition to specialized light autonomous delivery vehicles, the ruling would also allow use of autonomous small to midsize trucks and vans. (Source: Press release, California DMV, “California Authorizes Light-Duty Autonomous Delivery Vehicles,” Dec. 17, 2019)
It may still be some time before autonomous vehicles reach the Society of Automotive Engineers Level 5 (a Level 5 vehicle is capable of complete hands-off, driverless operation under all circumstances, where there are no provisions for human control). However, as you can see by the few examples listed above, considerable progress is being made and our autonomous future may be coming faster than some in the industry believe.
Insurers face an autonomous vehicle future, with possibly far fewer accidents and likely fewer owned personal vehicles, that will have a significant downward impact on auto premium.
There’s More Out There
There are numerous other emerging issues that could substantially impact the P/C insurance industry, including exposure to nanomaterials; the 4th industrial revolution (i.e., artificial intelligence, robotics and automation); occupational and consumer exposure to numerous toxic substances; mass shootings, including school shootings; student athlete traumatic brain injuries; climate change; and perhaps the most recently discovered potential emerging issue: exposure to airborne liquid crystal monomers emanating from device screens.
Given the hundreds of emerging issues currently facing the P/C insurance industry, is it reasonable to expect underwriters, underwriting managers and claims personnel—all with full-time positions and the pressures that come with those positions—to be able to adequately monitor so many potentially significant emerging issues?
With potentially hundreds of billions of dollars at risk from unexpected claims, one might wonder why so few companies have full-time emerging-issues positions.
(This article is published in the March-April 2020 edition of Carrier Management magazine. Other articles about emerging issues include: “12 Emerging Risks: Latest Risks Reveal Privacy, Liability Threats,” page 19; “Could Decreasing Fertility Lead to Public Health Litigation?” on page 23. To request a magazine, click on the image of the magazine on our homepage.)