Praedicat is committed to providing our clients with science-based casualty catastrophe modeling that will drive growth and innovation in insurance underwriting and risk management. To achieve these goals, Praedicat has created a model of emerging risks that is bottom-up—in other words, the model quantifies the financial impact of hypothetical events of mass litigation. There are three outstanding features of this bottom-up approach:
Forward-looking: When a liability catastrophe occurs, the products or business practices involved are usually discontinued, and likely to be excluded from the terms of an insurance contract. Consequently, the claims data generated by historical events prove to be poor predictors of the next liability catastrophe. Praedicat’s forward-looking model monitors all the science around the most risky products and business practices and uses that data to objectively characterize the risk of future mass litigation; this information is critical to the management of casualty systemic risk.
Exposure-based: The exposures and risks at the center of mass litigation must be understood before they can be managed. An understanding of the exposures driving tail risk in a portfolio informs both the mitigation of risk and business growth. Granular portfolio diagnostics allow for risk management and portfolio steering that can be executed, while facilitating the development of new named peril products. Praedicat has built thousands of mass litigation scenarios that serve as the underlying data element in the quantification of casualty catastrophe risk. Using this bottom-up approach, exposures and risk can be identified, quantified and managed.
Two-tailed: Liability catastrophe has two tails. The tail of the liability catastrophe exceedance probability curve represents low frequency, high severity events. The time period over which liability catastrophe claims are paid represents the long tail of casualty. Praedicat models both tails in quantification of future mass litigation risk, informing pricing, reserving and capital modeling decisions.
While top-down models have the advantage of immediate breadth, they are not capable of profiling risks that are specific to exposures, and thus are unable to inform underwriting, new products, growth or innovation. Praedicat’s approach to breadth has been to triage the greatest aggregated risks first. This means prioritizing risks with significant latency, which causes exposure to accumulate over time and across industries, policy years and insurance lines.
Praedicat’s models prioritize latent bodily injury, which historically accounts for the largest casualty catastrophe (e.g., asbestos, tobacco, pharma, etc.). The next largest category is latent property damage (e.g., MTBE, PCBs, pollution, etc.), for which Praedicat is currently developing a solution. The remaining pieces are sudden property damage and claims-made financial line losses; without the ability to accumulate over time, these risks cannot reach the same levels of aggregation, and the claims cannot cross policy years.
Our modeling approach and prioritization are based on the following key features of the prototypical liability catastrophe event, asbestos:
- Gradual accumulation of scientific evidence: To be successful in litigation within the U.S. legal system, standards must be met for scientific evidence supporting a hypothesis of bodily injury.
- Emergence of a signaturous injury: When the casual link between the exposure and harm is very strong, it is much more likely that a plaintiff will succeed in a legal proceeding.
- Large number of exposed individuals across a wide range of industries: Mass litigation involving a chemical, product or substance that is widely used throughout the economy poses significant potential for clash within an industry as well as across multiple industries.
- Harms manifest years after exposure: The long time period over which disease and harm develop typically allow for many years of claims accumulation before insurers have the foresight to manage the risk causing the harm.