A new report from Lloyd’s of London – the world’s specialist insurance and reinsurance market – is scrutinizing the power of supply chain management to understand and quantify liability events.
Released on Monday, the report examines liability exposure management and looks at the theory behind quantifying possible risk accumulation, Lloyd’s explained in a press release. Developed in partnership with Arium (Architects for Risk Identification, Understanding, and Management), an independent company specializing in risk modelling and decision support, the report sets out a conceptual framework to assess exposure to liability catastrophes across various lines of business.
“The platform uses publicly available trade data to help define the spread of potential liability for a harmful product or service through industries with potential exposure, resulting in a map of the event footprint,” the report said. “Information about the harm caused is combined with policy information to filter and refine this map, which is then used to calculate an aggregate loss for the scenario. To calculate insured losses, the scenario may be split into sub-scenarios, and parameterized to calculate a per policy loss.”
Mapping supply chains can also help insurers review their entire portfolio, both to look for areas of risk accumulation – where they may want to run scenarios – and to identify areas of opportunity, where little insurance is currently written and there is limited connection with insured risks, the report added.
“Insurers have historically faced a variety of challenges when attempting to manage liability exposures – including the difficult task of identifying where exposures are likely to accumulate,” said Trevor Maynard, head of exposure management and reinsurance at Lloyd’s, in a statement. “The scenarios explored in this report, which have been developed by Lloyd’s and Arium, centre on the mapping of liability against trading relationships while considering the legal system within which the economy functions, and is one example of how this issue can be overcome. As such, this approach is a promising step towards improving insurers’ understanding of emerging liability risks.”
Robin Wilkinson, CEO and founder of Arium, added in the statement that “casualty accumulations have lacked a generally accepted modelling methodology, including clarity on how to capture the relevant data.”
However, the methodology set out can help underpin a “consistent and realistic way of designing exposure scenarios by harnessing supply and distribution chain data as the basic building blocks,” Wilkinson said. “This is a first step in helping take liability exposure management down the path taken decades ago in property classes while, given the inherently greater uncertainty with casualty, seeking to incorporate greater transparency and stress testing. We believe this approach will aid better understanding of risks and opportunities in this exciting arena of insurance.”