The collapse of the dot–com bubble and the slump in global stock markets had an unexpected and systemic impact upon the casualty insurance markets. Previously, this had been regarded as a class of business exposed mainly to attritional losses. But, as we highlighted in last year’s report, certain elements of the casualty class are now more like a catastrophe–exposed account – where a single event can result in many very large claims from a wide range of policyholders.

Today’s claims, yesterday’s policies

The added complication of casualty business is the potential time delays inherent between the inception of policies and the emergence of claims. While Lloyd’s current trading entities are not exposed to pre–1993 liabilities, this long tail characteristic has been an issue for several years now, relating to claims from as long as 70 years ago, emanating from pollution and health hazard issues such as asbestos, as well as to more recent events. The legal environment in which business was written in the past was very different, and policy wordings were often couched in terms that did not foresee the types of losses that were to emerge many years later, making claims difficult to defend. Claims continue to emerge from business written in the period 1997–2001 and these represent the majority of the prior year reserve movement of 10.9% shown above.

Lloyd’s £3.9bn book

Lloyd’s casualty book covers a broad spectrum of classes of business from professional lines such as directors’ and officers’ and professional indemnity, to lines where insurance is compulsory such as employer’s liability. At £3.9bn of premium income, the casualty book is one of Lloyd’s largest and has enjoyed strong underwriting conditions over the last three years.

Loss ratios for the 2002–2004 years of account are running at promising levels but the long tail nature of the business means that it can be several years before a reliable picture of profitability emerges. As the accident year combined ratio confirms, current trading conditions are strong; but the overhang of losses emerging from the prior years continues to undermine the overall profitability of this account.

US tort reform: a high priority

As a wider issue, the system of tort in the US has been a major contributory factor to the costs of dealing with long tail liability claims. Figures recently published by the Insurance Information Institute (III) in the US reveal that tort costs have risen from $129bn in 1990 to an estimated $262bn in 2004, representing a remarkable 2.25% of US GDP. The III has also suggested that the rapid growth in tort costs has begun to slow; however, this was looking solely at the figures for 2003–4 relative to a long term trend which has shown very rapid growth. In the absence of meaningful reforms in the tort system, it will continue to be difficult for insurers to offer liability products to policyholders at attractive prices. Clearly, this is highly undesirable, since many policyholders would not be prepared to trade without appropriate insurance protections.