When insurance experts are asked what they see as the most important emerging risk for the property/casualty insurance industry, their consensus is cyber in some form.
While cyber obviously poses tremendous risks, some experts are also eyeing a variety of other emerging risks. These include risks inherent in government and insurance policies, not to mention blockchain, urban transportation, coastal property, retail deliveries and recreation.
1. D&O Privacy
The new Facebook lawsuit suggests that privacy-related concerns may already represent a potential new source of corporate liability exposure. The advent of the EU’s General Data Privacy Regulation (GDPR) will magnify these possibilities. While predictions of this kind are always tricky, it may be that privacy related issues may represent an emerging and growing area of potential directors and officers (D&O) liability exposure. It is important to note that these kinds of privacy concerns involve not just new age behemoths like Facebook that are “Hoovering” huge volumes of personal information. Many companies are capturing vast amounts of client and customer information, many of them in traditional industries — think how much your airline, your pharmacy, your credit card company, even your electric utility know about you. Of course these companies are mining this information for their marketing efforts and pricing analyses. These companies may well be sharing this information with collaborators, joint venture partners, third-party vendors, and so on. The recent developments at Facebook not only show the problems that can arise with the use of this kind of information, but also underscore how claims that this kind of information was mishandled can lead to bad publicity, a corporate crisis, and even significant D&O litigation. I could be wrong, of course, but I think we will see more D&O litigation in the future involving privacy issues. Indeed, the advent of the GDPR could significantly increase the likelihood of these possibilities. — Kevin M. LaCroix, The D&O Diary and executive vice president, RT ProExec, a division of R-T Specialty
2. Government Actions
The greatest industry vulnerability is constantly evolving governmental actions. Government imposition of retroactive liability or limits on the ability of the marketplace to price risk can threaten marketplace stability. Industry security is also impacted by the effectiveness of government security policies preventing terrorist attacks — particularly cyber warfare. PCI is ever vigilant, working with policymakers to prevent or at least help our members mitigate and manage the next asbestos, superfund, or 9/11 solvency threat. Our members are also very focused on the current technology race that is driving massive insurer investment in IT and changing business strategies and platforms to meet escalating consumer expectations. Emerging government and technology risks intersect in the cyber world, with PCI members’ chief risk officers most worried about aggregate losses and direct company exposure to a large-scale cyberattack. — Robert Gordon, senior vice president, Policy, Research and International, Property Casualty Insurers Association of America
3. Sandbox Trap
Regulation of insurance. Some traditional carriers are pushing for laxation of rules and momentum exists for creating regulatory sandboxes for new companies and distributors. For the legacy companies pushing for laxation, I’d suggest one should be careful of what one is wishing for. Reasonable but strong regulation protects companies often against themselves, and it protects consumers from companies that might find ways around quality capitalization, disclosure, and quality coverages.
4. Tax Accounting
The Tax Cuts and Jobs Act took effect on Jan. 1, 2018, and has had an immediate impact on accounting professionals because of the large overhaul on the U.S. Internal Revenue Code. I think it has produced two primary risks for an increase in claims: advisory-related risks associated with fully educating clients and managing client expectations and increased risk of error in the preparation of the tax return itself. Both of these risks stem from the accountant needing to fully understand the new tax code changes and apply them accurately. — Catherine Putman, underwriting director for Portfolio Management, Bond & Specialty Insurance at Travelers.
5. Regulation Fragmentation
Regulatory fragmentation from state to state in the area of data and cyber security. There are many differences between EU’s General Data Protection Regulations (GDPR) and emerging U.S. state regulations. GDPR provides provisions around processing personally identifiable data (PII) of people residing in the EU, regardless of country citizenship and location. These “data controllers” can be EU firms or firms operating in the EU from other jurisdictions and must demonstrate technology, process and organizational compliance. The PII definition is broader than definitions of the same concept used in the U.S. and covers almost anything that can be attributable to a person. The cost and confusion for international reinsurers will only increase as more state regulations emerge. — Mitchell Wein, vice president of Research and Consulting, Novarica.
6. Policy Deficiencies
I believe the most important emerging “risk” is increasing deficiencies in insurance policies themselves, especially in personal lines. Because of dominant industry advertising, consumers are being led into thinking the only real difference between insurance companies is the price of their policies. Compounding that is the emergence of insurtechs that tout they can place your insurance in seconds by asking only a few (or even one) questions. Clearly, they are competing only on price and so-called convenience. At some point, insurance providers will be operating about as efficiently as they can when it comes to sales and underwriting. At that point, the only way to compete on the basis of price will be to address the loss cost component of premiums. I believe we’re seeing that right now and the easiest way to do that is to reduce the coverage in the insurance product and/or engage in more restrictive claims practices. Buying policies that don’t cover much is itself a risky proposition. — Bill Wilson, founder and CEO, InsuranceCommentary.com.
7. Irrelevant Policies
One of the biggest emerging risks is whether insurers will be able to adapt quickly and effectively to dramatic societal changes threatening to breach traditional policy boundaries and lines of business. To remain relevant for buyers operating in the sharing, virtual and gig economies, carriers will need to adapt policy language to account for the blurring of lines between commercial and personal use of property and time as well as among individual product lines. They also need to create new coverages or adjust existing policies to address new exposures in cyber risk, 3D printing, robotics and the use of drones, as well as increasingly alarming climate-related risks. — Sam Friedman, Insurance Research Leader, Deloitte Center for Financial Services.
8. Fundamental Auto
The fundamental changes to autos and the auto business in the next decade will provide opportunities and threats to the auto insurance business. Private and commercial auto insurance accounts for more than 40 percent of overall property/casualty direct written premium. Private and commercial auto insurance margins are constantly under pressure. Technology will confluence with planned auto industry movements toward mobility-as-a-service versus vehicles as products. Driver assistance technology with lidar, radar and other sensors provides greater safety in select situations, but concurrently increases the danger of drivers failing to pay attention. Even where safety is enhanced, the proposed lighter vehicles and increased miles driven create challenges to established pricing models. Ride sharing, ride-on-demand and fully automated vehicle business models are largely based on the premise of doing away with individual ownership of vehicles, which would impact personal auto insurance. Fundamental premises of who the “driver” is, state licensing and registration, and legal liability will be transformed by these developments, which will also impact insurance products and services. — Tom Karol, general counsel-federal, National Association of Mutual Insurance Companies.
9. Unprotected Assets
Digital assets already have more value than physical ones. Since the Andreessen’s famous article “Why Software Is Eating the World” 10 years ago, this change has become evident. However, insurance solutions that answer the need for protection of digital assets are not here yet. Obviously, cyber liability insurance is answering one part of these needs and will continue to grow, but I don’t think it is addressing all of the enormous needs of protecting digital assets. The higher the digital asset relevancy, the bigger and more articulated the need to protect it. I consider this the single most important emerging risk for P/C insurance professionals, so I would not be surprised to see an insurer create a business line dedicated to digital assets both in personal and commercial lines. — Matteo Carbone, founder and director, IoT Insurance Observatory.
10. Risky Playgrounds
Architectural Digest magazine reports there is a new movement to bring risk back into parks and playgrounds. Children’s playgrounds, with features including spiked nails and steep drops, have been gaining popularity in the UK and are coming to the U.S. Educators are claiming that “purposeful risky play promotes resilience and builds more self-reliant young people,” the article says. Public playgrounds are being designed to actively present that risk. “What that looks like — playgrounds with access to saws, knives, loose bricks and two-by-fours, and fire — is something that might sound alarms for some parents here in the litigious U.S.,” the author writes. The “designed risk” movement is getting support in the U.S. from architects and designers, according to Cheri Ruane of the Boston Society of Landscape Architects. Her firm designed a park in a Boston neighborhood that includes elevated concrete piers that children traverse to experience moving across uneven surfaces, plus a high tree house and a high, long slide. Parks in New York, Houston, Minneapolis and Santa Clarita have also followed the trend. — Elizabeth Wallace, Architectural Design, “Inside the Rise of “Risky’ Playground Design.”
11. Dockless Scooters
Electric scooters are popping up in urban areas across the country. In some locations, the firms — Bird, Lime, Spin and others — have flooded sidewalks with their scooters, following the “ask for forgiveness, not permission” tactic of early Uber. Users pay through an app with a credit card and do not have to return the scooters to a particular location. There have been complaints of scooters abandoned on sidewalks and in doorways. Some cities have moved to ban them, if only temporarily, until rules are in place. Cities are balking, but the trend is taking hold. Injuries are growing. Dr. Natasha Trentacosta of Cedars-Sinai in Los Angeles said she is seeing injured patients on a daily basis, including some who need surgery at least once or twice a week. Personal injury lawyers have taken note. Bloomberg reported people hurt riding or hit by scooters in San Francisco and Los Angeles have been calling legal firms to file claims. Personal injury law firm Omega Law Group in Beverly Hills reports getting five calls a week for scooter accidents since April. “Most of the calls come from riders hit by reckless motorists who are not used to sharing the road with the small scooters,” the firm’s website says. Another firm told Blomberg that while riders hit by cars may have a strong cases, pedestrians injured by scooters on a sidewalk are often out of luck because there is no insurance company to sue.
12. Driving Deliveries
Europe’s agency for workplace health and safety (EU-OSHA) thinks the rising demand for fast and free home and work delivery of retail goods needs monitoring. Purchasers are expecting faster deliveries and more accurate delivery times but are not willing to pay the price, which is bound to impact delivery driving. First, the increase in e-retail means there are more driving jobs, including gig economy drivers who tend to use private cars to fulfil deliveries. There is a link between business driving and increased musculoskeletal disorders rates (especially lower back pain). Possibly compounding this are health risk factors for drivers, including: compromised employer terms and conditions related to gig economy drivers; long working hours, possibly resulting in driver fatigue; and increased performance demands linked to fast delivery and specific delivery times. While improvements in delivery vehicle and equipment design and the introduction of driverless vehicles may help alleviate health risks, these could take years to be mainstream.
13. Compliance Witnesses
New research from corporate consultants at Gartner indicate that employees who witness misconduct are twice as likely to leave an organization. Twenty-nine percent of employees observed at least one compliance violation at work in 2016 or 2017, according to a Gartner survey of more than 5,000 employees. Fifty-nine percent of those who observed a compliance violation were actively looking for a new job, compared with 29 percent who did not witness bad behavior. “While attrition is not an obvious area of concern for compliance executives, it should be,” says Brian Lee, compliance practice leader at Gartner. “Employee misconduct and the failure of compliance to address it plays a considerable role in motivating employees to leave their current organization.” Lee also says that the departure of key employees should be deemed a warning of possible underlying compliance-related issues. Employee attrition costs large organizations millions of dollars each year and the loss of a particularly conscientious employee can be debilitating, not just to culture and morale, but to employee productivity, according to Gartner.
14. Coastal Communities and Property Values
Recent studies suggest that the threat of rising seas is undermining property values in coastal communities. Researchers at the University of Colorado and Pennsylvania State found that homes with exposure to the sea sold for 6.6 percent less than unexposed homes. Harvard University researchers found that properties at higher elevations were appreciating faster than properties at lower elevations. Insurance Journal has reported that, according to the Union of Concerned Scientists, accelerating sea level could put more than $1 trillion in property at risk by the end of the century. The report shows Florida has roughly one million homes and $351 billion in decreased property values at risk of chronic flooding by century’s end, followed by New Jersey (250,000 homes), and New York (143,000 homes). Nearly 175 U.S. coastal communities may see 10 percent or more homes at risk of chronic flooding by 2045. Places that could be hit hardest include Louisiana, Maryland, New Jersey and North Carolina.
15. Smart Contracts
While smart contracting based on digital ledger or blockchain technology holds great promise for the insurance industry, it isn’t without risks. Locke Lord attorneys Christopher Barth and Theodore Augustinos, writing in Insurance Journal, point out that some of the benefits of blockchain — immutability, transparency and decentralization — also present concomitant risks. For example, if an insurer inadvertently discloses nonpublic personal information subject to privacy protections over the blockchain, there is no “control-alt-delete” button enabling a do-over. Further, remedial efforts will be hampered by the permanency of the disclosure and its widespread distribution. Ross Nodurft, risk management leader at One World Identity, reminded a PLUS audience this year: “One reason you have to be careful is because garbage in, and garbage out. You are going to build up an identity that’s either private or it’s wrong,” he said. “So, you have to be careful about what’s going in during the initial creation and verification when using blockchain for identity.”
This article was originally published in Insurance Journal Magazine.