Emerging risks and mass litigation are just a few of the factors driving rapid transformation in the casualty catastrophe market, according to a joint report by Moody’s insurance solutions and Aon.

Per- and polyfluoroalkyl substances (PFAS) contamination, social media addictive software design, microplastics, and environment-related liabilities are reshaping the liability landscape, causing both industry volatility and market opportunity.

The report, “$5B growth opportunity in the coming casualty catastrophe market,” highlights how litigation financing continues to drive previously unexpected large verdicts with latent long-term uncertainty, forcing insurers to re-examine reserving methods.

The report notes that long-tail risks “threaten the stability of insurers’ reserves and challenge traditional actuarial models.”

The structural change, previously seen in the property catastrophe market, opens up considerable opportunity for reinsurers willing to “strategically leverage data, analytics and innovative risk-transfer mechanisms.”

The frequency, complexity and severity of mass tort exposures today are akin to natural catastrophe losses, the result of litigation financing, social inflation, and public nuisance theories driving claims frequency and severity.

These factors, the report warns, have the potential to turn isolated liability events into systemic market crises.

The report outlined how more frequent casualty catastrophe events can lead to the following:

• Increased reserve volatility: Emerging risks have increased latency relative to attritional claims because of new legal arguments and new science. When exposure to emerging risks increases, reserves based on historical claims can underestimate the reserve duration, increasing the need for reserve restatements. Decreases in unobserved emerging risks can lead to over-reserving. Both can lead to increased volatility with cyclical reserving crises.

• Correlation and systemic risk: A single mass tort litigation event, such as PFAS liabilities, has the potential to impact multiple companies and lines of casualty insurance simultaneously. The rising risk of correlated exposures amplifies reserve volatility, making it more difficult for insurers to maintain predictable financial outcomes.

• Unsustained tort reform solutions: Tort reform measures like damage caps and limitations on class actions provided temporary relief, but plaintiffs have adapted rapidly through multi-district litigation, public nuisance theories, and strategic litigation financing, often outpacing reforms.

It’s a situation that can’t be ignored, with six out of the 13 largest loss events in the U.S. property and casualty industry being casualty events. Besides generating losses, deficient reserving has been the leading cause of insurer impairment, the report noted.

The typical market response to mass litigation is to add exclusionary language within a policy, a reactive measure that doesn’t address the required changes needed as frequency and severity ramp up.

An annual reinsurance market size has been estimated at $5 billion, with significant additional growth potential from legacy liability transfers and innovative parametric structures, according to the report.

Insurers can navigate volatility, enhance profitability, and gain a competitive advantage in the rapidly evolving casualty catastrophe market by proactively embracing innovative solutions and advanced analytics, as Moody’s and Aon have done by leveraging advanced casualty catastrophe modeling, innovative named peril and latency reserving solutions, and strategic financial mechanisms.

“The casualty catastrophe sector has reached an inflection point, where a structured, scalable market is rapidly emerging,” said Amanda Lyons, global product leader at Aon’s Reinsurance Solutions. “We are not just responding to these market changes – we are developing and implementing advanced solutions in order to proactively shape a scalable, structured market that is poised for substantial growth. Supported by our insights and technology, we are encouraging reinsurers and other capital providers to allocate capacity to these risks and help drive the development of innovative products.”

Named peril policies offer more clarity than traditional broad policies by clarifying upfront the coverage afforded to the inclusion of emerging pre-litigation threats such as microplastics or ultra-processed foods.

Reduced reserving uncertainty, better financial predictability and simplified risk aggregation management are among the benefits of this type of policy, according Moody/Aon.

In addition, the report outlines how a named peril casualty policy offers the ability to mobilize defense capital to combat growing litigation funding available to plaintiffs. The capital can be deployed when new mass litigation with developing scientific evidence or novel legal theories emerges, allowing insurers the ability to “ring-fence exposures, reducing the likelihood that jury awards translate into catastrophic indemnity losses.”

Latency reserving is another area driving better occurrence management while also increasing market growth by stimulating runoff markets and legacy transactions.