The shifting terrain of risk and uncertainty on the liability insurance field

This paper looks at the limitations of quantitative models for evaluating risks in the liability insurance business, and suggests that insurance risks very often are not reliably calculable except in hindsight, at which point the risk has already been transformed into an all-too-measurable loss. Insurance is an “uncertain business,” characterized by competition for premiums that pushes insurers into the unknown. Even life insurance, the part of the business that manages the oldest and best-understood insurance risk — mortality — operates just beyond the limits of knowledge. The paper also investigates whether liability insurance premiums in the U.S. market have grown at a much higher rate than, say, property insurance premiums, which many attribute to the highly litigious U.S. market, and finds that in fact both have grown by about the same percentage since the 1960s. The reason that many commentators believe that liability insurance premiums have increased disproportionately is because they do increase by a greater amount during hard market periods, which is when the press seems to be paying more attention. These findings suggests that if liability insurance premiums simply kept up with inflation, rather than fluctuating during hard and soft markets, insurance companies would not come under the kinds of attacks in the media that we have all become accustomed to.