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Litigation Property Preservation Liability insurance — a fast growing innovative liability product in China

Liability insurance remains one of the fastest growing lines of business in China. From 2009 to 2017, this line registered a Combined Annual Growth Rate of around 20 % (according to China Insurance Year book), and is expected to outgrow most other risks in the non-life sector. One of the reasons for the line’s rapid expansion is that with a share of 4% of premiums, casualty still assumes a relatively small portion in the overall portfolio mix of Chinese insurers. Although China’s non-life penetration has increased to 1.8%, as compared to the global average of 2.8%, liability insurance stands at a meagre 0.05% of GDP.

While growth in most other lines of business will start slowing down, liability insurance is expected to continue expanding rapidly. One of the reasons for the fast-paced growth of the liability lines is the changing regulatory environment in China, which started with the introduction of Tort law in 2009 and continued with broadened consumer protection rights, safety laws as well as tighter environmental protection. Another reason for China’s liability lines growth is that many innovative activities are from the liability segment and Litigation Property Preservation Liability insurance (LPPL) is one of those.

With some similarities to the function of litigation bond in common law countries, LPPL is a unique liability insurance product tailored to the current China’s Civil Procedure Law. The insurance, which essentially is a surety, protects the insured against any liability out of his wrongful act causing the actual loss of an injunction on property.

For example in a tort case, a plaintiff sues a defendant for damages he incurred. To reclaim and be adequately compensated for these damages, he might ask the court to issue an injunction against the defendant that he might not conceal, transfer or sell his property until the case has been settled.

However, such an injunction might cause actual loss to the defendant’s property which has to be compensated, should it turn out that the plaintiff has committed wrongful acts out of the application of the injunction. On a fair basis, the court which issued the injunction, would ensure that the defendant will be compensated for its actual loss should the original plaintiff commits wrongful acts in the above matter. China’s Civil Procedure Law stipulates that the plaintiff has to provide some kind of guarantee or deposit to the court to assure that he is in a position to compensate for such potential damages once he files the suit.

Before LPPL was launched, courts usually accept bank guarantee or other forms of bond. Bank guarantee was and is still preferred by courts but not a favoured choice for the plaintiff because it may affect the plaintiff’s credit limit in an inconvenient time such as during the period of litigation. Bond issued by small to medium guarantee companies was the popular form of guarantee, however, courts may consider the possibility of insolvency of those guarantee companies.

With the launch of LPPL as a liability insurance, it has then become the preferred solution to both parties, i.e. the plaintiff and the court. Although at the beginning of the trial period (2014- 2016), there were differing opinions on whether such liability insurance policy should be accepted by courts as a form of guarantee. These debates ended after the Supreme Court in China issued provision regarding litigation property preservation at the end of 2016. Since then, LPPL insurance is officially acceptable by the courts in China.

For the Chinese government and the courts, the LPPL is an attractive solution as it helps to promote and preserve social justice. The insurance cover, which is more affordable than the bank guarantee due to different capital cost, allows a plaintiff to seek compensation even if he is not in a sound financial situation. It is thus expected that the acceptance of LPPL will continue to rise.

The LPPL market experienced robust growth since 2014. The market volume was already approximately RMB1billion (approximately US$150 million) in 2017 and the incurred loss ratio seemed to be on the low side. When it was first launched in 2014, there were only a few insurers offering LPPL. Today, the majority of domestic insurers in China provide this business line. With fierce competition, the market saw sharp rate reduction in the past two years. The underwriting control also varies among different insurers. We found the major risks of both the long tail and the severity nature of LPPL is currently well underestimated by many insurers, which may affect the healthy development of liability insurance market in China.

Peak Re, as one of the first few reinsurers entering the LPPL market, has decided to allocate resources to provide data analysis and case studies for our cedents’ better underwriting decision-making and risk management.

Earlier this year, our underwriting and actuary department spent three months compiling case studies and data from various public sources. Our analysis include long tail by different categories, severity by different risk types, territory difference, uncertainty of legal opinion, etc. We presented our LPPL research in Peak Re seminars held in Beijing and Shanghai this April and the research was well-received by our clients; solidifying Peak Re’s position as a reinsurer with strong research and service capability to the market.