2017 Most Dangerous Emerging Risks

Artificial Intelligence Ties Liability in Knots

The same technologies that are driving business forward are upending the nature of loss exposures and presenting new coverage challenges.
By: | April 7, 2017 • 7 min read

Despite dire predictions of an “Automation Apocalypse,” it turns out that automation has only obliterated one job in the last 60 years. (Sorry, elevator operators.) However, the steady encroachment into the workplace of automation, robotics and cutting edge technologies is all too real. Robots aren’t just making cars and widgets and filling warehouse orders. They’re harvesting crops, flipping burgers, making pizza and folding laundry — just for starters.

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For businesses, the potential boons are obvious: reduced labor and operational costs, reduced turnover and fewer injuries from repetitive tasks, increased overall safety, production speed and quality. Some economists project that current trends will eventually lead to lower prices and increased demand.

Unfortunately all of that silver lining isn’t without its dark clouds. The potential risks are evolving just as fast as the technology itself, and both insurers and insureds will be hard-pressed to keep up. Questions of liability and coverage and product response are becoming increasingly murky.

Yesterday’s loss scenarios were more or less straightforward. If a truck fails to brake and the resulting crash causes a loss, where does the liability lie? The operator? The truck manufacturer? The brake manufacturer? There might be disputes over fault, but at least the possibilities were limited.

Now you have the same crash in an autonomous truck and the questions can make your head spin.  Was the circuitry at fault? A chip? Was there a fault in the programming? Was there a connectivity issue? Was it hacked? Did the machine choose not to apply the brakes because of a specific set of circumstances presented?

Having a confluence of factors contributing to losses is not anything new in the insurance industry said Gail McGiffin, principal in the EY insurance practice and leader of underwriting, product, policy and billing solutions. What is new “is the breadth of everything that technology touches these days,” she said. The result being that you’re no longer talking about the combination of one or two technologies, it may be more like five technologies or more contributing to the complexity of an exposure.

John Lucker, principal and global advanced analytics market leader, Deloitte & Touche

“You have to think about some of these emerging technologies — that combination of artificial intelligence with machine learning, with semantic web, with predictive models — all being in operation,” she said.

“Dissecting the exposures introduced by individual technologies is challenging enough but understanding the compounded effect of this multitude of technologies and how it’s contributing to exposure and product response — that is the next major challenge area that we’re facing in the industry.”

If a piece of equipment has embedded intelligence, “whether it’s analytics, whether it’s robotic process automation, whatever the case may be — there’s a shift of liability that’s tacit and implicit inside of the underlying product or service,” agreed John Lucker, principal and global advanced analytics market leader with Deloitte & Touche.

What’s unclear at the moment said Greg Hendrick, president of property & casualty insurance and reinsurance at XL Catlin, “is how it’s all going to come together when you actually have something unfortunate happen — who’s going to pay what? That’s the interesting thing about this emerging risk: What normally was perceived as a usual course of action for liability could shift as you see more and more technology, more and more autonomy, enter your vehicles and your manufacturing process.”

Divvying Up Liability

For all parties connected to a loss, the challenge will be not only trying to sleuth out the root cause, but then teasing out an answer to the question of whose policy, and which line will respond to the loss.

“From the insurance side of this, I think the biggest risk is that they just don’t know what the risks are.”   — John Lucker, principal, global advanced analytics market leader, Deloitte & Touche

Let’s say a programming error created a serious security flaw in one piece of software operating a fleet of autonomous industrial vehicles or machines. A hacker exploited the flaw and caused the entire fleet to unexpectedly halt, rendering every unit permanently inoperable.

Multiple crashes arose from the unexpected stalls as well as significant business interruption losses. The manufacturer took a stiff reputational hit for its inability to make good on contracts for days or weeks while trying to get back up and running. How can the company expect their program to respond?

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The company’s property policy might not exclude coverage for physical damage and business interruption caused by a cyber attack. But then again, it just might.

On the other hand, its cyber policy might only cover the loss of data in the event of an attack, but not property damage. Would the equipment manufacturer’s product liability policy respond? The software developer’s errors and omissions policy might respond, but maybe not, if the damage was caused by the attacker rather than by the programming error directly.

With each loss scenario composed of its own unique set of variables, questions about where liability rests are likely to result in a lot of finger-pointing between stakeholders.

“If there’s a part that goes bad and it’s just a one-off, then maybe we have a product liability issue,” said Lucker.

“If there are a couple hundred [pieces of equipment affected], maybe it’s a product recall liability issue. It could be errors and omissions — the engineer could have made a mistake, the programmer could have made an error. It could be directors and officers liability — this could have been an issue that was discussed in the boardroom and the board didn’t react appropriately so these other liabilities could flow upwards to the boardroom.

“We’ve shifted something that used to be fairly simple — who’s at fault and who’s going to pay for it — to a complex suite of problems and products that makes either personal or commercial risk management much more complicated,” he added.

In one sense, it’s not that different from a simple failure of a mechanical part, said John Denton, managing director at Marsh USA. The manufacturer of a defective part or the manufacturer of equipment incorporating that defective part have historically been assigned liability for any accidents arising out of that defect.

“In the same way, the developer of the software or the manufacturer of the part that incorporates that software has that same liability from the software defect that the manufacturer of the part previously had,” he said.

The key difference in many cases, he said, may be that the software company or the manufacturer of the part using the software may not have experience with any significant third-party liability, and may not have a program that is designed to respond to that liability.

Claim Development Needed

“From the insurance side of this, I think the biggest risk is that they just don’t know what the risks are,” said Lucker.

Insurers are definitely asking questions, said Denton. But “time will tell whether they’re asking the right questions.”

The brunt of the challenge will necessarily fall to underwriters, who are going to have to become even more technologically savvy than ever before, said McGiffin.

Greg Hendrick, president of property & casualty insurance and reinsurance, XL Catlin

“This is about understanding technology in the world at large, and understanding it as a function of each of the industry segments you might be writing, and each one of the accounts, to be able to identify the proportion of risk introduced by these different elements — to be able to assess the risk, evaluate the mitigation that’s in place, and then make decisions and price the exposure … it’s just taking it to a whole new level of sophistication.”

Claim development is another key piece of the puzzle, she said.

“As we have more and more claim activity, claim adjudication, claim litigation, and we understand how the confluence of technologies and the modern work environment play out through claims, we learn how those losses are settled and the contribution of each technology — as well as the combination of technologies — to the root cause of loss.

“You can’t substitute the years of claim history that still have to happen.”

Even though underwriters will try to manage the exposures with existing policy forms and language, that claim development will be necessary to guide new products, said Hendrick.

“Quite often your best intentions of what you meant to spell out and what you did spell out end up being interpreted differently by a court of law,” he said.

Insurers, said Lucker, will have to “redraft and recraft” policies to create more clarity about the risks they’re taking on.

“Challenge yourself to constantly keep in tune with how your company’s risk profile is changing based on this technology revolution.”    — Greg Hendrick, president of property & casualty insurance and reinsurance, XL Catlin.

As that claims history develops, paths to subrogation may become less clear for insurers, said experts. Difficulties tracing through the supply chain to understand the role of each player will make it more challenging first to sort out which policy is the primary, but then to understand the litigation path to recover from other parties who share blame for the loss.

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“In the end, the primary insurance policy, whatever it is … regulators are going to hold that insurer responsible for doing the right thing for the insured — getting a check cut or getting something fixed or making sure that somebody’s medical bills are paid,” said Lucker.

“The consumer has to be made whole in a fair way. How that gets sorted out behind the scenes among all of the various parties — that becomes the insurance companies’ problem or the insurance ecosystem’s problem.”

For their part, regulators, at some point, “are going to have to start thinking more about this tangled web of potential liability and all of this contractual finger-pointing and subrogation, and how the industry is going to sort this all out,” said Lucker.

“It’s going to produce a whole lot of litigation so this is a kind of permanent employment plan for the legal profession and it’s not going to be simple to sort out.”

Risk Managers Must Keep Pace

It’s unclear whether everyone along the chain of those who make and produce autonomous, robotic or intelligent equipment is up to speed on the shifting exposures, said Hendrick. But risk managers employing these technologies are definitely thinking about how this risk is evolving and how it could impact their organizations, he said.

“Whether it’s their commercial fleet of cars or commercial fleet of trucks, their warehouse equipment, their manufacturing equipment, their retail or office buildings … with more and more interconnectivity, they’re definitely starting to think about,  ‘OK where does liability sit, how does it arise, and who’s going to be responsible?’ ”

“There really isn’t an industry out there that’s not exposed to additional risks already as a result of this technology,” said Marsh’s Denton.

“So everybody — whether industrial users, drivers, auto or refrigerator manufacturers — everybody’s got to grapple with this new technology and that potential increase in exposures and risks and how their insurance program will respond to that.”

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That’s why no business can afford to simply renew their insurance program without due diligence, he added. “You can’t just renew your program with the same limits and the same type of coverage. As technology changes … the nature of the risk may increase or decrease or the size of the risk will change. You need to constantly evaluate your program to see if it responds to the potential magnitude of the exposure.”

Risk managers must be continually asking, “Are the products that I’ve historically bought the right ones to buy to protect the risks that I have now?” said Hendrick.

Companies will need to keep assessing their own programs as well as their suppliers’ programs to ensure they have the right amount of coverage in the new technology enabled world, he said.

The goal is to stay ahead of each wave of change and keep adapting, he added.

“Challenge yourself to constantly keep in tune with how your company’s risk profile is changing based on this technology revolution,” he said. &

________________________________________________________________

2017 Most Dangerous Emerging Risks

Cyber Business Interruption

Attacks on internet infrastructure begin, leaving unknown risks for insureds and insurers alike.

 

 

U.S. Economic Nationalism

Nationalistic policies aim to boost American wealth and prosperity, but they may do long-term economic damage.

 

 

Foreign Economic Nationalism

Economic nationalism is upsetting the risk management landscape by presenting challenges in once stable environments.

 

 

Coastal Mortgage Value Collapse

As climate change drives rising seas, so arises the risk that buyers will become leery of taking on mortgages along our coasts.  Trillions in mortgage values are at stake unless the public and the private sector move quickly.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurance Executive

A Leader for Turbulent Times

Lloyd’s CEO Inga Beale is tasked with guiding the venerable insurance market through Brexit and the demands of the fiercely competitive global specialty business.
By: | July 6, 2017 • 12 min read

Underwriters at Lloyd’s are accustomed to taking on complex, even daunting, risks. The company’s leader looks at the world today and sees plenty of opportunity, but also much to be concerned about.

“Political instability is something that troubles me more than anything else because I think there is now more uncertainty across the world than there has ever been,” said Inga Beale, CEO of Lloyd’s of London.

“It feels that all of the norms that I grew up with are being challenged — openness, globalization, acceptance, inclusion — on a global scale.”

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Appropriately, we’re sitting around a table in Beale’s modern glass-fronted office at the top of the Lloyd’s Building — itself a vision from the future — to talk about Brexit and Lloyd’s newly announced Brussels subsidiary.

Add to the mix Donald Trump and the threat of nuclear attack from North Korea, the bombing of Syria and a spate of terrorist attacks across Europe, and it’s clear we are living in the most dangerous period certainly since the Cold War, or possibly ever, believes Beale.

That belief received even more chilling reinforcement when terrorists detonated a bomb at an Ariana Grande performance in Manchester, England on May 22.  Twenty two people, some of them children, were killed and more than 50 wounded in that attack.

Three years ago, it was Beale herself making world headlines with her appointment as the first female CEO in Lloyd’s 329-year history. But now Brexit and other seismic disruptions to world order have taken center stage.

Lloyd’s announced at the end of March that it would establish a new European subsidiary in Brussels in time for January 1, 2019 renewals so it can continue writing risks for all 27 European Union (EU) and three European Economic Area states after the UK exits the EU.

Currently, it uses its passporting rights to serve EU customers from London, but the expected loss of those rights after Brexit necessitated the establishment of a new subsidiary.

For now though, it’s business as usual, said Beale, with the UK remaining a full EU member for at least two more years. She added, with a reassuring smile, that there will be no immediate impact on existing policies, renewals or new policies written during that time.

“We were campaigning very much to remain in the EU before the referendum because we knew what the likely impact [of leaving the EU] would be on Lloyd’s,” said Beale, whose impressive resume includes stints with GE Insurance Solutions, Zurich and Canopius.

“We rely very much on our licensing network, and being part of the EU means that from London we can write insurance and reinsurance for all of the EU countries with our passporting authority.

“But with the UK exiting the EU, it now means that we lose those licensing powers to offer insurance with immediate effect. To counteract this, we have determined to set up a subsidiary within the EU, meaning that about five percent of our global revenues will have to go through this subsidiary because it is insurance business offered to our EU-based clients.”

Beale and her team also negotiated that most of Lloyd’s underwriting business will remain in London, as will the majority of the transactions and decision-making powers. Meanwhile, the manpower needed to run the new Brussels operation will be in the “tens rather than hundreds,” she is quick to point out.

“It’s not a huge raft of people having to move over,” she said.

“Lloyd’s will continue to do 95 percent of its business as it has always done — it’s only the other five percent that will have to go through a separate legal entity, and we’re not anticipating any further changes to our business model as a result.”

Beale, whose dual role is both supervisor and advocate for the market’s 100-something member underwriting syndicates, says that the franchise board chose Brussels over other locations including Luxembourg, Dublin and Malta because of its “robust and quality” regulatory regime.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it.” — Inga Beale, CEO, Lloyd’s of London

It also provides access to a multilingual talent pool, is near to London, and, most importantly she stresses, is located in a member state with a “very high certainty of staying in the EU.”

“We want people who reflect our customers,” she said.

“The London insurance market is littered with people from all over the world because London is such a global insurance hub, so we need experts here who speak the language and understand the different cultures.”

North American Footprint

Despite its large European market, it’s the other side of the pond where Lloyd’s really thrives. Approximately 46 percent of its business comes from the U.S., mainly California earthquake and East Coast hurricane risks, she said.

Lloyd’s also remains the No.1 excess and surplus lines insurer in the U.S. and the largest non-U.S. domiciled insurer, she added.

“We have done really well in terms of growing our E&S market share over there,” she said.

“That’s our sweet spot; those non-standard risks that are hard to place.”

By contrast, Beale said that reinsurance has become a much more competitive market with new entrants offering alternative types of reinsurance putting a squeeze on prices. As a consequence, Lloyd’s has focused more on insurance, she said.

“We have also done well in Canada and with our delegated authority through our Managing General Underwriters and Managing General Agents,” she said.

“It’s this very local and specialist distribution channel that has been our success story across North America.”

In January, Beale was made a Dame Commander of the Order of the British Empire — the female equivalent of being knighted — and is also the Association of Professional Insurance Women’s Insurance Woman of the Year for 2017.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries.” — Inga Beale, CEO, Lloyd’s of London

As the person directing Lloyd’s, she is also acutely aware of the shift in power towards emerging economies, with McKinsey recently reporting that 67 percent of commercial insurance growth will come from those markets by 2020.

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In response, Lloyd’s has focused its efforts on Asia and Latin America, transferring more than half of its managing agents to its Shanghai and Beijing platforms; and it was recently granted final approval to open a reinsurance office in Mumbai, she said.

“That’s where the future’s going to be,” she said.

“We know that a lot of the business is no longer coming to London in the traditional way, hence we have set up a Singapore platform and platforms in China, and opened up an office in Dubai as well as in India to be closer to our clients and brokers there.”

Lloyd’s profits last year were flat at $2.7 billion, while GWP was up $3.9 billion.

The market made a profit despite taking a $2.7 billion hit for major claims — the fifth highest such total since the turn of the century — primarily due to Hurricane Matthew and the Fort McMurray Wildfire in Canada.

Although natural disasters are Lloyd’s bread and butter, its real strength is in insuring complex risks, from cargo ships and satellites to political and terrorism risks.

Lloyd’s Role in Cyber

It’s the aggregation of those harder-to-quantify risks such as cyber security that concerns Beale most. Expected to grow to $7.5 billion in global premiums business by 2020, cyber is a big focus for Lloyd’s. It has a 25 percent market share and aggregate limits of approximately $650 million per risk, she said.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries,” she said.

“We saw that with the financial crisis and the collapse of Fanny and Freddie, and its impact on Greece, but now it’s cyber.

“We have interviewed numerous risk managers and they are telling us that they are only insured against less than 10 percent of the risks that their businesses face on a daily basis. Our challenge is to make sure that we are continuing to adapt as fast as their businesses do and that we are delivering the relevant products that they need.”

Another area where Lloyd’s has seen an uptick is political and terrorism risk, said Beale.

The U.S. standoff with North Korea, Brexit and a swath of ISIS terrorist attacks across Europe have only exacerbated the problem, heightening fears among those countries’ citizens and tearing whole communities apart.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].” — Inga Beale, CEO, Lloyd’s of London

Just witness the anguish of the victims and families in the Manchester concert bombing.

“We have seen a dramatic increase in demand for these types of products because of the political instability everywhere at the moment, particularly for companies that are trading cross border with countries where governments can suddenly intervene at a moment’s notice,” she said.

“Similarly, businesses are looking to protect themselves against the ever-growing threat of terrorism, which is where Lloyd’s can step in to give them the confidence to keep on trading.”

Reforming Lloyd’s

Within Lloyd’s itself, Beale has been at the forefront of trying to modernize the aging institution. Despite its modern metallic and glass exterior, inside Lloyd’s there’s still very much what some might term a stuffy “old boys’ club” culture.

Men are required to wear a tie and women weren’t allowed into the underwriting room until 1972. Brokers still walk around with leather slipcases crammed full of paper.

The Lloyd’s headquarters on Lime Street.

Beale’s predecessor, Richard Ward, tried to modernize Lloyd’s but left plenty for Beale to address in that respect.

Beale committed $700 million over the next five years to upgrade Lloyd’s aging computer and IT systems, with the end goal of achieving one-touch data capture to speed up the premiums and claims process.

“It’s about following that data all the way through the process from the client to the intermediary and the underwriter, and the processing of the premiums and claims,” she said.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].”

Another area Beale is keen to shake up is diversity within Lloyd’s itself. Currently the market is two-thirds male, while only 11 percent of the whole London insurance market are non-UK nationals — a damning statistic that Beale is all too aware of.

“The Lloyd’s market doesn’t reflect the demographics of the whole of London and we are very conscious that we’re not tapping into all of the available talent that’s out there,” she said.

“We need to cut out the old ideas, try to challenge the unconscious bias and create an environment that is welcoming for people who are a bit different.”

Beale has also been pushing the [email protected] initiative, currently in its third year, and in September Lloyd’s will host the third annual Dive In festival to promote diversity and inclusion in the insurance industry.

In addition, 95 percent of the Lloyd’s market has already signed up to its Diversity & Inclusion charter to improve diversity, she said.

“To attract the best talent we need to modernize and look at how we can change our working practices and hiring decisions for the better,” she said.

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“There’s a vast amount of work that we are actively doing to encourage people to be more open and seek more diverse talent.”

On a personal level, Beale readily admits that she was late to the leadership game, and it was only her mentor, Annette Sadolin at GE, who convinced her to take her first promotion.

That lack of confidence is something that, as a leader, Beale has witnessed in her own team and she is keen to help overcome.

“Annette became very much a mentor for me throughout my career, so whenever I have had to make key decisions I would always ask her view,” she said.

“The key lesson that I have learnt from her is that things move so quickly and you need to take opportunities when they come along that give you exposure to something new, even if they don’t seem like a natural career path at the time.

“For me, being a leader is all about inclusion and being passionate about the people you work with because you need to inspire and motivate them. But there is also nothing more rewarding than watching people progress their careers.”

A Truly Global Journey

Beale, who initially harbored ambitions of being an architect, admits that she “fell into reinsurance,” starting as a trainee international treaty reinsurance underwriter at Prudential Assurance Company in London in 1982. But once she had a taste there was no turning back.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it,” she said.

“I fell in love with the global nature of the risks that came to London; one day you could be looking at a piece of business from Chile, the next from Australia.”

But, back then, working in a male-dominated industry where she was the only woman among 35 men, Beale struggled to fit in. So she quit and went travelling for 10 months.

It was during her time as a receptionist at the BBC in Sydney, Australia that Beale worked under her first female boss, a formidable woman, she said.

Inspired by her boss’s strong work ethic, Beale decided to return to the insurance business.

She soon landed a job with GE Insurance Solutions in Kansas City, where she held various underwriting management roles, before being appointed president of GE Frankona and head of continental Europe, Middle East and Africa for GE Insurance Solutions in Germany.

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After 14 years at GE, Beale moved to Switzerland with Converium as group CEO in 2006.

Two years later, she joined Zurich Insurance Group as a member of the group management board in Zurich before being appointed global chief underwriting officer, prior to her appointment as group CEO at Canopius in 2012.

The breadth and depth of her experience makes Beale a natural fit for the demands of the Lloyd’s top job.

There’s no doubt she’ll be drawing upon every ounce of that expertise and experience to keep Lloyd’s at the cutting edge of this harrowing new world we live in.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]