Lloyd’s has released a report to help insurers better manage liability exposures, which are more complex because they are harder to conceptualise than natural catastrophes.

The paper from risk modeller Arium provides guidelines for constructing liability scenarios.

“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,” Lloyd’s Head of Exposure Management and Reinsurance Trevor Maynard said.

The report explores a number of liability scenarios, considering how they can be resolved in the current economic environment.

“As such, this approach is a promising step towards improving insurers’ understanding of emerging liability risks,” Mr Maynard said.

Unlike natural catastrophes, liability catastrophes can take a long time to unfold, and the financial impact may require years or decades to accurately calculate.

“It is important for insurers to consider harmful events that are unlikely to occur,” the report says. “The aim of this report is
to investigate the potential impact of some unlikely scenarios, not to predict that events will occur.”

The report presents two case studies: a financial scenario involving a Ponzi scheme and a non-financial one based on e-cigarettes.

It shows how an Arium-designed conceptual framework using publicly available data and software can help insurers assess potential liability for a harmful product or service.

It says mapping supply chains, as demonstrated in the report, will help insurers review their entire portfolios.

“Mapping supply and distribution chains illustrates the fact liability can arise in industries beyond that from which a potentially harmful product or service originates. This report… presents one approach to the challenge of understanding emerging liability risks. Lloyd’s hopes it will inspire further contributions to drive innovation in the insurance industry.”