Long-tail risks – No patent solutions

One of the key functions of reinsurers is to cover long-tail business. The management of long-tail risks is a growing challenge for everyone involved. To ensure optimum use is made of the limited capacities available and to meet the individual needs of the different markets and lines of business, it is essential that insurers and re insurers pull together.

How best to manage risks of change in long-tail business is a key issue for the insurance industry. In order to avoid unpleasant surprises, we have to analyse in depth the economic, social, legal and technological trends that influence the corresponding financial risks. Losses that are incurred but not reported, or incurred but not yet settled, are an especially critical aspect, the problem being that, in a world of increasing change, it is all too easy to underestimate the dimensions of long-term trends.

The lines of business with risk-of-change exposure are primarily workers' compensation, motor thirdparty liability and product liability, where it may be a very long time before all the claims arising out of a single loss event are known or settled. This is particularly true of motor third-party bodily injury claims. In developed economies, the uncertainty is largely due to soaring healthcare expenses and the burgeoning costs of providing care at home or in residential accommodation. According to OECD estimates, care costs will rise by as much as 7.3% per annum up to 2050, partly as a result of greater life expectancy and increases in the currently low levels of healthcare wages. At the same time, health expenses are growing due to advances in medical science together with new drugs and treatments. All in all, the result will be a massive rise in healthcare costs.

A further factor is that compensation standards are not exempt from efforts to harmonise the European market. On social grounds, they are more likely to be adjusted upwards than downwards. At the same time, growing importance is being attached to protection of the victims, and particularly children.

Risks of change are also increasingly encountered in emerging economies. Loss of earnings constitutes a large part of severe personal injury claims in countries where the economic boom has triggered above-average wage increases. Countries where formerly low indemnity limits are now rising pose a special challenge. This is a development we can expect to see, for instance, as the fifth motor insurance directive comes into effect in eastern Europe. Moreover, with increasing prosperity in the emerging markets, demand for healthcare will rise, and with it costs. Finally, the effects of increased life expectancy will be particularly evident in the emerging economies.

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