Liability insurance
Market situation and review
Various negative factors were responsible for the hardening market, in particular the critical claims development in the liability class (especially in the US), but also other political, social and economic developments: the war in Ukraine and the associated energy crisis, as well as inflation and climate change, were the primary drivers. This was reflected in rising premiums, declining capacities and less flexibility in underwriting.
Market development 2024/2025
Currently, however, the market is calming down. Premiums have stabilized, albeit at a high level. Insurers seem to have concluded the desired capacity reductions for risk diversification in their entirety. The background to this is probably the fact that the combined ratio of most industrial insurers has improved significantly in recent years and is again (in some cases significantly) below 100 percent in most cases. In addition, there is the development of interest rates, which is now bringing insurers noticeable profits from financial investments. Munich Re is also predicting “stable prices” for the upcoming renewal due to a slight decrease in reinsurance costs.
Many insurers are now becoming more flexible when it comes to underwriting new risks.
Competition can be increasingly generated again for companies that many insurers are willing to take risks on, such as manufacturing companies in the upper middle market segment, so that (moderate) premium reductions appear feasible here for risks with a good track record.
It is clear that the vast majority of insurers now want to spread their risk more broadly, i.e. they are offering less capacity for individual risks and dividing their capacity for large risks across as many coverage sections as possible in “smaller slices” (“ventilation” of capacities). Despite this change in behavior, however, there is sufficient capacity in the market, also due to the arrival of new risk carriers such as Everest Insurance and Sompo International Insurance. The situation remains tense only for industries considered to be high-risk, such as the pharmaceutical, chemical and automotive supply industries, as well as for companies with high US exposure, especially for large industrial risks.
Due to inflation in recent years, as well as rising costs for personal injury and increasingly costly damage in the US, we strongly recommend reviewing and, if necessary, adjusting the current coverage amounts. Since 2020, the consumer price index in Germany has increased by a good 19 percent – however, there is no sign of a corresponding increase in the sums insured in liability insurance.
It is a negative development that some insurers are starting to involve law firms at an ever earlier stage in the claims settlement process. This often gives the impression that the primary task of these law firms is not to settle the claim with the claimant, but rather to check the coverage of the claim under the insurance contract. This makes it more difficult for the customer and the risk carrier to work together in partnership. Even at this early stage, lengthy discussions between the parties, involving the broker, are often necessary to steer the handling of the claim in the right direction.
There are current developments, particularly on the liability side, often triggered by new EU initiatives and their progressive implementation, which in turn can have an impact on liability cover. Even though most of these developments are known and have been discussed in the past, an update on the latest developments follows:
1. New EU product liability directive and regulations on AI liability
On March 12, 2024, the EU Parliament adopted the new EU product liability directive to strengthen consumer protection. This must now be transposed into national law by the member states within 24 months of publication. It will then apply to new products placed on the market.
In addition to this new regulation, various initiatives for dealing with artificial intelligence (AI) are coming into force in the EU, with a focus on the resulting liability issues. For example, there is a draft directive that amends and clarifies the Product Liability Directive with regard to liability for AI systems. This draft is currently in the legislative process and has not yet been finally adopted. In contrast, the Artificial Intelligence Act was adopted on May 21, 2024, and only needs to be published. An EU proposal to regulate liability when using AI has currently been put on hold, but could well be taken up again by the EU in the future.
2. EU Supply Chain Act
While the German law on supply chain due diligence has been in force since January 1, 2023, the corresponding legislation at the EU level has taken longer than expected. After heated discussions of the original draft, a “defused” version was adopted in the EU on April 24, 2024, not least at the instigation of Germany and Italy.
The thresholds for the applicability of the directive were increased to 1,000 employees and 450 million euros in annual turnover. The provisions on civil liability were also weakened. Nevertheless, adjustments to the German LkSG will have to be made in the implementation process, since the EU law goes beyond the LkSG in some places, even in the weakened version.
Overall, there is a clear tendency for current EU legislation to particularly strengthen consumer protection and to attach particular importance to topics in the area of Environment, Social, Governance (ESG). This has led to numerous legislative initiatives that significantly tighten the civil and criminal liability of companies and their governing bodies. This also has a knock-on effect on insurance coverage and the loss burden.
3. PFAS
The risk of per- and polyfluorinated alkyl substances (PFAS), also known as “forever chemicals”, has been known in the market for several years. Recently, there has been an increase in lawsuits against manufacturers and/or users of these substances.
4. US losses
Currently, there are almost no liability lecture events and no insurer discussion without a discussion of the US risk of damage.
In recent years, there was talk of the increase in so-called “nuclear verdicts”, i.e. verdicts with a sum of more than ten million US dollars. Meanwhile, there is also the category of “thermonuclear verdicts”, which refers to verdicts with compensation sums of over 100 million US dollars. The average sum more than doubled within three years, from 21 million US dollars (2020) to around 44 million US dollars (2023). Last year, a total of 89 verdicts were handed down for over ten million US dollars, 27 of which were over 100 million US dollars. A large proportion of these (37 percent) are product liability cases. Other areas that are heavily affected include personal injury in the life science sector, damages related to patent law, and motor vehicle liability claims that often result in liability insurance after local basic coverage in the US.
These developments also affect German companies with high US exposure, especially those with large vehicle fleets in the US. The sums insured of the preceding local motor liability insurance often have to be increased, since the US umbrella covers only accept this risk after higher local sums of at least two to five million US dollars, which causes the local premium requirement in motor liability to increase.
Conclusion
The topics that move the industrial liability market have not changed significantly in the past year. On the positive side, the market has noticeably calmed down. On the negative side, there is the increasingly unpredictable risk of claims in the USA and the way some insurers are handling the PFAS risk. Many EU legislative initiatives to strengthen consumer protection and promote ESG issues will have medium- to long-term effects on the claims development in industrial liability
Your deas solution
When it comes to technically demanding discussions, such as a PFAS exclusion, you can rely on deas' extensive expertise. We put you on an equal footing with the insurers in the discussions to minimize negative impacts. We challenge inflexible insurers and replace them if necessary. We use the purchasing power of our parent company, the Ecclesia Group, the largest German insurance broker, to your advantage. In addition, we use our market overview to put together the increasingly complex syndicates for large international programs, due to the high coverage amounts.
Jörg Linnert