The legacy run-off market has witnessed enormous growth in the past decade and developed into a key component of the global insurance market, with non-life liabilities in run-off now estimated to be in the region of $800bn.
Legacy business is no longer confined to long-tail asbestos and environmental liabilities. Solvency II and increased regulatory scrutiny, Brexit and the developing regimes for business transfers in the US, are provoking interest in books across a number of business lines, and of more recent vintage. A surge in deal activity across an increasingly wide range of business lines is predicted in the post-COVID-19 environment.
Legacy acquirers will be looking to take the cost out of the claims process and manage claims with a greater level of efficiency. Concerns will continue to exist about the potential for future legacy claims lines to develop, revealing previously unknown and emerging risks.
Talc and opioids have seen exponential growth in litigation, but perhaps the starkest example of the need for potential pre-transactional claims scrutiny is the recent glyphosate litigation in the US, which has quickly mushroomed into a mass toxic tort.
Bayer, which acquired Monsanto, the owner of the Roundup brand, just weeks before the first jury award, suffered a significant hit to its share price following that verdict, with more than $10.9bn subsequently being pledged in an attempt to settle the majority of the estimated 125,000 claims.
Bayer's experience highlights the dangers of hidden legacy risks in mergers and acquisitions and insurance business transfers, emphasising the need for robust due diligence to be undertaken. Other material long-tail liabilities that are held on the balance sheets of manufacturing companies and other corporations are likely to be key issues for legacy acquirers in these sectors in the future.
All insurers, including run-off entities, will also need to monitor the developing scientific picture to ensure they remain ahead of the curve. Developments in a diverse range of areas, examples of which include perfluorinated compounds, 5G/electromagnetic technology, sugar, shift work, nano-tubes, and blue light all have the potential to raise significant legacy issues in the future, with their likely latency periods ensuring that any claims arising will come with a sting in their long tail.
A depth of understanding of the claims and litigation environment for each line of business will ensure acquirers of legacy business minimise any nasty surprises that may reveal themselves in the future. Legal risks will not only arise from developing scientific understanding, but are inherent in the shifting legislative and judicial landscape, particularly the historic issues of UK jurisprudence being exported and the increase in US-style litigation trends spreading globally. Legacy acquirers will need to understand the developing legal landscape in order to be able to anticipate claims spikes that may compromise their future bottom line.
Legal systems are subject to political, social, and economic pressures and, once a need for change is identified, the pace of that change can be quick.
South Africa is a case in point, with constitutional reform triggering the class action brought by gold miners suffering from silicosis, which resulted in a record-breaking settlement. Before the democratic transition, such developments could not have been predicted and would not have been contemplated in insurers' and run-off entities' models.
Social inflation has a renewed significance in the US market, is thought to be developing in the UK and other markets, and is another mechanism increasing litigation risk. Several key factors, including the rise of litigation funding, consumer-friendly regulation, the growth of claims management companies, judicial expansion of liability (e.g. vicarious liability), a broader interpretation of contract terms, and changes in laws and regulations (e.g. relaxing of limitation) will all operate to make litigation more likely. Such macro-trends will need to be closely monitored to ensure any shift in the claims landscape can be mitigated before their full effects are felt.
US plaintiff law firms expanding internationally in their quest for new claims will exacerbate litigation risk further. With the capital and expertise to pursue large-scale litigation and class actions, the impact of the claimant lobby to exploit new areas of risk should not be underestimated. Similarly the risk of US toxic and other mass torts being exported to the UK and other jurisdictions also needs to be watched with care. Attempts to bring opioids, talc and glyphosate-related claims are likely to increase, although stricter causation tests are likely to operate as a barrier to claims in the UK on the basis of current scientific understanding.
Such a diverse range of developments indicate an increasingly complex claims landscape which legacy acquirers will need to navigate with care as part of their due diligence process in order to ensure that the market can continue its impressive growth in the decades to come.
This article was first published in Insurance Day on 30 July 2020.