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Fat Chance

Global belt-tightening? Business is loosening its belt to cover its ever-expanding liability limits.

By  Coletta Kemper

Identifying potential exposures is one way insurance brokers can help clients anticipate and manage their risks. A new Sigma report from Swiss Re on commercial liability highlights the risk of growing liability exposures around the globe and the threat they pose for businesses and the industry.

Liability insurance covers a host of risk exposures, including environmental impairment and professional product and employment practices liability as well as directors and officers and workers comp. Liability exposures rank high on risk managers’ list of concerns—and for good reason: Liability claims are rising, as are potential damages.

According to the Sigma report, in 2008, businesses around the globe spent nearly $142 billion on liability insurance, or about 25% of what they spent on all insurance. Commercial liability insurance represents a little less than 9% of the global non-life market premium volume, but it’s expanding.

The top 10 markets, including China, accounted for 91% of the worldwide commercial liability market. The developed markets account for 95% of global commercial liability insurance. Considering its aggressive legal environment, it’s no surprise that the United States’ share of the market is more than half of the world liability market (54%).

In the Americas, Canada is the second largest liability market with $4.9 billion in premiums. Its market has been growing annually by an average of 15% since 2000. Latin America’s share is about $1 billion with an annual growth rate of about 14% over the last 10 years.

The U.K. is the second largest liability market in the world with premiums of $11.7 billion. Employment-related accidents and illnesses in the U.K. accounted for 30% of premiums. The largest markets for liability insurance on the European continent are Germany, France, Italy and Spain, which accounted for a combined $26 billion in gross liability premiums.

In the Asia-Pacific region, Japan and Australia lead the commercial liability market with premiums of $4.7 billion and $3.8 billion, respectively. The liability market is catching fire in emerging countries as well. Those markets generated $2 billion in 2008 and have grown at an average annual rate of 19% since 2000.

The growth potential in China is significant. Although market penetration is low, its commercial liability market has grown annually at an average rate of 22% in the last decade. Other emerging markets in the region averaged 10% growth during the same period.

The Sigma report notes that the United States poses a special challenge to corporations with U.S. exposures. Marsh reported that corporations with significant North American operations bought close to twice as much coverage as those without risks in North America. They also paid about 60% more for insurance. Data from RIMS show that larger U.S. corporations spend 48% of premiums on liability insurance, or about 2% of revenues.

In addition, companies that have experienced large losses (greater than $5 million) often purchased limits about 3.5 times higher than those not incurring large losses. What was once thought of as an American problem is a growing trend in other parts of the world. In Europe, limits were nearly twice as high for companies experiencing large losses.

As the report points out, the risk to the economy of underestimating liability claims is substantial. Over the long term, growth in commercial liability claims outpaces GDP growth significantly. For example, between 1960 and 1980, the compound annual growth rate for liability claims in the U.S. was 9.4%, while the nominal GDP rate was 7.1%. In the U.K., liability claims grew 10.8%, while GDP grew at 9.2% between 1970 and 1980.

There are a number of reasons for the growth of liability claims, but the cost of healthcare is a key driver. Interestingly, the report says growth in liability claims is more closely related to expenditures in healthcare than to the Consumer Price Index or wage inflation. In fact, healthcare expenditures grew at roughly the same rate as liability claims.

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