Oortfolio – What’s New?
We are pleased to announce a major update to our casualty catastrophe model, which was released on March 24th. These enhancements focus on the simulation of defense and settlement behavior in the first few years of a mass litigation event incorporating:
- A new model of mass litigation activation
- “Duty-to-defend” catastrophe
Brief explanations of these modeling enhancements follow. Please contact your account manager for more detailed explanations.
Mass litigation activation
The focus of this model release is in simulating the early stages of a mass litigation event, a time in which major plaintiff actions are initiated and bellwether cases aggressively litigated. This release introduces the concept of “mass litigation activation,” a discrete event in which plaintiffs file a large number of lawsuits making similar allegations of bodily injury or property damage. These initial lawsuits will typically be consolidated in state or federal multidistrict litigation with the aim of facilitating discovery and settling the question of general causation: Does the scientific community generally accept the possibility that plaintiffs could have been injured in the manner alleged? The overall caseload expands rapidly in the first few years of the litigation event and then levels out as only newly exposed or injured plaintiffs file suit.
The trigger for mass litigation activation – the accumulation of scientific evidence supporting plaintiffs’ allegation of harm – remains unchanged. The difference is that this accumulation of scientific evidence now induces many similarly situated plaintiffs to file suit in close succession; the incumbent model permits these actions to occur more gradually and with less scientific support. The newly released model, therefore, projects 28 percent fewer litigation events, but the surviving events are, on average, 44 percent more severe, reflecting the reality that there is no such thing as a “small” mass litigation. Overall, across all modeled events, expected economy-wide settlements are 10 percent lower, while settlements in the tail of the distribution – measured by TVaR(5) – are 61 percent higher.
Duty-to-defend catastrophe
The severity of a mass litigation event is a function of both the costs of defending lawsuits and the number and size of any settlements. Defense costs, though, typically dominate in the early going. Indeed, in many mass litigation events, the defense ultimately prevails, but not before substantial costs have been incurred. Simply being a named party in a lawsuit can lead to significant costs since getting removed from that suit is no simple matter. Our casualty catastrophe model now captures these zero indemnity, defense cost only events, which we refer to as “duty-to-defend” catastrophes.
The newly released model generates duty-to-defend catastrophes by positing that a small fraction of lawsuits with marginal scientific support, but the potential for significant settlements due to wide-spread exposure and attractive corporate targets, become active. Activation brings in a large number of plaintiffs and “litigious energy,” which creates significant defense costs even though defense prevails in the vast majority of these cases.
Approximately 32 percent of mass litigation events in this model release are now defense cost only. While defense cost only events on average result in lower total expenditures than do events entailing settlement, these defense expenditures can be sizable, nonetheless. Duty-to-defend catastrophes can also bring in a large number of small and medium size enterprises that incur non-trivial defense costs removing themselves from the litigation.
Across all modeled events, defense costs now represent 30 percent of total expected costs, up from 21 percent in the incumbent model. The bulk of this additional defense cost load comes from defense cost only events.
The combined effect of the mass litigation activation and duty-to-defend enhancements is to increase expected economy-wide losses (indemnity and defense) by about one percent, while increasing tail losses by 52 percent.
Distribution of losses over time
Our enhanced model of early stage litigation has resulted in a significant change in cumulative losses over time. With this model release, 51 percent of expected nominal losses are incurred by insureds within the first eight years of the simulation (2020-2027), up from 19 percent in the incumbent model. This change reflects the reality that a large fraction of eligible plaintiffs join lawsuits within the first few years of activation generating large defense expenditures and, when supported by science, early settlements. As before, the model allows previously-exposed, but newly-harmed plaintiffs to file lawsuits in subsequent years meaning insurance claims will continue to emerge for many years; but the bulk of claims are now realized significantly earlier in time.
Portfolio-level impacts
At the economy-level, the modeling enhancements described above have resulted in:
- Higher probability of zero losses, but thicker tails for most Litagion® agents
- Larger number of companies (big and small) with non-trivial early stage litigation defense costs
- Higher proportion of total losses flowing to the first years of a litigation event
The impact of these modeling enhancements on individual portfolio-level results, however, could vary significantly depending on the companies (and their exposures to Litagion agents) within a portfolio and how those companies are insured. Please reach out to your account manager for help in understanding the impact of this model release on estimated losses within your portfolios.