Robert Reville, Chief Executive Officer (CEO) of Praedicat, an InsurTech risk modelling and analytics company for casualty re/insurers, has claimed that the company’s approach to disease litigation may create an opportunity for ILS to enter into the casualty space.
Praedicat uses scientific literature to model more than 60,000 potential disease litigation scenarios and the company sees a $90 billion annual growth opportunity in offering named peril insurance cover for these risks, such as legacy run-off and excess casualty top-up.
“To do all this modelling we’ve had to take very seriously the time path of litigation, because that’s the only way to do this right. Looking at how diseases emerge, how litigation emerges after diseases emerge, and how the science can support it, as well as how it plays out as a future time path of litigation,” Reville had explained at a press briefing during the Monte Carlo Reinsurance Rendez-vous event.
“This time path can also be used to deal with the well-understood problem for ILS being willing to enter into casualty,” he added. “There is a lack of understanding of what the tail looks like, and this approach could be used to divide up the tail and have an opportunity for ILS to enter into casualty as well.”
Speaking in an interview with Artemis and our sister publication Reinsurance News, Reville proposed that capital markets have historically avoided the casualty space due to the extremely long-tail of the risks, which may tie up invested capital for decades at a time.
“Capital markets don’t want to invest in something where they have the capital held for 20 years, so that has stood in the way of a lot of capital market involvement in casualty,” Reville said. “That’s the long-tail – nobody wants to invest in an ILS that has such a long tail.”
Praedicat’s models aim to track the entire time path of litigation by modelling the way diseases are generated by exposures over a lifetime, while at the same time monitoring how the science is evolving and how these two factors might come together and cause litigation.
The company’s models also account for how, over time, people who were exposed to a hazardous substance earlier might develop a disease later and thus make a claim later, allowing it to predict when in the future historical exposures will result in claims.
“So all of a sudden now you actually have models that have tackled that long-tail and are able to say: What is the probability that there will be litigation covered by this year’s underwriting that is initiated in year one through three? In year three through eight? And in year eight through fifty?” Reville explained.
“And so different capital providers will have different taste for different parts of that time tail,” he added. “ILS might like that zero to three tranche and some reinsurers might like that three to eight tranche, and then people like Berkshire might like that eight to fifty tranche.”
Although Praedicat does not have any active development work going on with ILS, Reville considers alternative reinsurance capital to have a potentially significant role to play in closing the protection gap that exists in liability today.
Praedicat’s analysis suggests that, within the casualty litigation space, there is $86 billion of legacy that should be run-off today, a $15 billion annual latency catastrophe market that could exist if reinsurance capital enters the market, and potential growth in liability of $90 billion annually by closing the protection gap.