The evolving landscape of liability exposure
Product liability poses a unique risk—it is unpredictable, can involve large dollar amounts, and presents significant exposure from claims arising many years or decades after a product is produced or even removed from the marketplace. In addition, when claims arise after a manufacturer goes out of business, other parties in the supply chain, such as retailers, parts suppliers, and contractors, are at risk of becoming target defendants for product liability claims.
Milliman helps clients avoid being blindsided by liability claims and future exposures that aren’t fully assessed or reflected on the balance sheet.
Christine Fleming: We know about the product that's out there that's causing harm already. We know to exclude asbestos from our insurance coverage policies and CGL. We know about the 20th century, what we're not sure about is the 21st century. What we need to be better prepared for is the next wave of product liability. What are the potential exposures that are currently being implemented and used in commerce that we haven't assessed the exposure on?
Elizabeth Cohen: One of the more difficult pieces of product liability reserves is that clients aren't looking at the future of where their products are going to be and what claims may be coming up, especially when you can have a claim that is very high severity/low frequency. All of a sudden, you get a pop and you're on the hook for a very large dollar amount.
Bob Meyer: Actuaries come in to assess what the long-tail nature and costs of product liability claims are, be it from current operations—a manufacturer still in business—or a manufacturer who is out of business but whose products are still in the marketplace.
Chris Tait: They're buying product liability insurance policies, but they're only going to cover the claims that are made in the next year. The issue really is that product liability can go on for 40 or 50 years depending on what type of product you're manufacturing.
Bob Meyer: We think that there are a lot of employers that are not thinking about that in the proper actuarial way. Some of these liabilities won't emerge as a claim for many, many years to come, and a full recognition of the liability on the balance sheet could be years beyond that as well.
Elizabeth Cohen: Clients may not realize the long-term nature of product liability. It's very long-tailed and you have to know how long your product is out there for, what's the attrition rate, are they being replaced by newer models, are people not using them as much or are they still out there lurking on the shelves?
Chris Tait: When we're talking about product liability, we're talking about incidents that are going to arise in some cases years after the product is put in the marketplace. So it could be five or 10 or 20 years before the defect in the design of the product is finally discovered, and that's when the litigation will begin. The cost of the product liability claims is not just the settlements that are reached with the plaintiffs, or a jury verdict that's rendered, but it's also the cost of defending those claims.
Elizabeth Cohen: Manufacturers are not the only ones with product liability exposure. If a manufacturer were to go out of business or not have enough money to pay a claim or a large lawsuit, anyone else in the chain can be brought in as well. Distributors could be brought in, suppliers, and a retailer could easily be seen as a deep pocket for a small manufacturer or one that's gone out of business.
Christine Fleming: If those manufacturers are no longer in existence to sue, the plaintiffs will go ahead and look for other possible sources of recovery from other possible defendants and that can be a retailer. Even though the retailer is far removed in many people's view from the source of the actual injury or the source of the manufacturer of the product, they're still within that stream of commerce and still can be a target defendant for these types of suits.
Chris Tait: If you're a company that's out there manufacturing products, from an enterprise risk management standpoint this is really a liability that you should be quantifying, even if it doesn't appear on your balance sheet. So if you go to sell one of your product divisions, it really shouldn't be a surprise—you should have a pretty good idea already what these liabilities are.
Elizabeth Cohen: There are so many different variables in a product claim: How the claim happens, who it happens to, and an actuary really needs to be able to analyze all of those risks and aggregate all of them to get a true financial impact.
Christine Fleming: Assessing reserve figures is a very challenging task, it depends highly on case reserves, it depends highly on payment patterns, it depends very heavily on how much product is out in the stream of commerce and how many losses you're expecting to come in that have happened already but you don't know about yet.
Chris Tait: And actually, as you're selling your products today and you're trying to calculate the cost of goods sold of those products, you really need to be factoring in the expected future cost of all those product liability claims that could arise at some point down the road.
Christine Fleming: What a company needs to do in this day and age is to assess fully its exposures from soup to nuts. It can no longer be satisfied with, "We've done things this way for so long and it has worked well for us," we need to constantly be thinking about the next step.
Chris Tait: One of the things that we would try and do is get a real handle on how many products are in the marketplace and how long are they likely to stay there, and then we would estimate expected cost of claims that are going to be filed 10 or 15 years down the road, related to products that were manufactured at some point in the past.
Christine Fleming: As a company, as an operation, you need to understand how all the parts are working together and whether you're prepared for that next wave of exposure, whether you're prepared enough so that you won't be blindsided, so that you can handle whatever surprises may come your way. And that's what Milliman does, hands down, not just from the actuarial view, but from the claims view, from the underwriting view.