What is a Casualty Catastrophe?

What is a Casualty Catastrophe?

What is a Casualty Catastrophe? 150 150 Praedicat

That was the fundamental question that we were grappling with back in 2008. We had just launched an R&D initiative that was a joint project between RAND and RMS. RMS is the leading company providing analytics to manage property insurance catastrophes. They were supporting a project at RAND to explore whether similar analytics could be developed that would be useful for managing the potential for catastrophes in casualty insurance — the sister C to property’s P in P&C insurance. Casualty had, after all, been the home of insurance’s largest catastrophe: asbestos.

Asbestos was first and foremost a grim human catastrophe of horrible proportions. But RAND had recently published a report documenting the corresponding financial catastrophe that had struck the defendants in asbestos litigation and their insurers. Over $70 billion had been paid out in compensation and defense costs. This was more than Hurricane Katrina or Andrew, 9/11 or the Northridge Earthquake. Despite the magnitude of this financial catastrophe, there was no analogue to RMS’s capabilities available for casualty insurers. Given RAND’s experience with the empirical study of asbestos and other mass torts, teaming up with RMS to address this need seemed like a good idea. The rest, as they say, is history.

But let’s return to the original question. What is a casualty catastrophe anyway? We have asbestos as the canonical example. Tobacco resulted in an epic legal settlement even if insurers seemed to have avoided exposure. Litigation over pollution from various sources during the 1980s generated a range of other casualty catastrophes. Fen-Phen had resulted in some $20 billion in losses for some defendants and their insurers. DES, a drug, resulted in multigenerational litigation and novel legal principles such as “market share liability.” Smaller scale but seemingly waiting in the wings were others such as benzene and manganese in welding rods. There also were other kinds of casualty catastrophes: options backdating, or IPO laddering, for instance. Wage and hour litigation in California. What unified this diverse set of events?

As we thought about this, we made note of the key characteristics. A large number of liability claims was needed because if there were only a few, it wouldn’t be a financial problem for insurers. Multiple defendants was a necessary condition as well because insurers are able to handle a single defendant through limits on the amount of insurance offered to any one client. Even with millions of plaintiffs, the insurance industry would be protected if only one defendant was involved. The next key element was that the plaintiffs alleged damages arising out of a common commercial product, activity, practice, or event. This last piece was the key because it is what creates correlation in the insurer’s portfolio. Analyzing and predicting this underlying common element became the focus of our efforts. We needed words to describe it and Lauren Caston, our Mathematician, floated “litagion agent.” It was the contraction of litigation and contagion and captured the idea that if an insurer had it in its portfolio, they were likely to find it would spread. We loved it and our insurer friends did as well. We liked it enough we decided we better get the trademark!

The pieces were now in place and we had our definition:

Casualty catastrophe: A large number of liability claims naming multiple defendants and involving multiple plaintiffs alleging damages arising out of a single litagion(R) agent.

The journey toward Praedicat® was now under way.