Long-tail risks are creating greater uncertainty and increased risk for business. To address this growing problem and elaborate solutions, the ICC Task Force on Long-Tail Risks will publish guidelines based on a meeting convened in Paris last June of the Commission on Financial Services and Insurance.
Also called long-term liability risks, long-tail risks are so named because of the long time period between initial exposure to risk and any resulting loss or damage. Industrial products, such as chemicals and pharmaceuticals, represent possible long-tail risks because the potential damage due to the use of these products often emerges after a long time has elapsed. Many people may use a product without being aware of its dangers, and may only notice damage or injury much later. A catastrophic total loss can result from such long-term loss.
At the June meeting, the Chairman of the Long-Tail Risks Task Force, Lennart Edstrom, led a discussion on recent developments that have created long-tail risk for business. New scientific and technological developments – such as the use of electro-magnetic fields in everything from X-rays, lasers and CDs, to genetic engineering and nanotechnology – create new and often unknown risks that have the capacity to affect many people within many different jurisdictions. The inability of business to properly manage these risks may lead to adverse effects on society and have a chilling effect on further advancements in science and technology.
Long-tail risk is also fuelled by increased litigation due to cutbacks in social security benefits, a rise in class action legislation, and new liability rules and laws that provide greater protection for victims, with retroactive compensation.
Without available analysis on the macro-economic impact of long-tail risk, and with mounting levels of uncertainty over insurance coverage capabilities, concerns are growing for long-term market stability, economic growth, and greater uncertainty, the task force emphasized.
Participants said traditional markets that deal with long-tail risks, such as insurance and financial markets, have no choice other than to reject these risks outright, which passes the risk exposure to businesses, and ultimately to society and taxpayers at large.
Going forward, the task force agreed unanimously that business, consumers, and other stakeholders needed greater predictability of the risks and the consequences associated with long-tail liability risk.
The task force outlined specific recommendations for stakeholders, including for regulators and governments. The group encouraged regulators to ensure the right balance is struck between victims’ protection and risk financing. They also encouraged regulators to enlist financial institutions when developing regulations. At the same time, the group advised regulators to consider market realities and manage increasing exposure to long-tail risks.
The task force also said that regulatory developments, such as Tort Law, show that regulators are taking for granted the ability of business at large, and the insurance industry in particular, to cover these risks.
Given the current lack of a careful analysis of future insurance coverage capabilities by business, the task force further encouraged business to consider alternative risk financing methods, such as no-fault insurance, compared to the current preferred model of liability insurance. The task force also said that legislation calling for retroactive compensation was unacceptable.
A policy statement will be published soon incorporating the findings and guidance assembled by the task force.
