PLUS Report

Turning the Market

The number of professional liability class actions is on a record tear, which should impact rates eventually.
By: | October 12, 2017 • 5 min read

The professional liability (PL) market became increasingly more competitive recently with record levels of capacity and capital and insurers fighting on price and policy terms to gain share.
Among the most competitive areas on coverage and pricing is middle market technology Errors & Omissions (E&O), closely followed by Directors & Officers (D&O) and employment practices liability (EPL).

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With large data and privacy losses from retail and big technology services claims mounting up on top of already expanding global privacy laws and a lack of primary PL coverage for tech firms, opportunities abound, particularly in cyber.

Cyber also drives demand for higher limits in the wake of the recent spate of high-profile cyber hacks and narrow indemnification language in vendor agreements.

With an estimated 500 PL securities class actions expected in 2017, according to industry experts, it’s probably only a matter of time before the market turns.

All of these factors will be key talking points among brokers, insurers and risk managers at next month’s Professional Liability Underwriting Society (PLUS) 30th International Conference in Atlanta.

“Rates are still coming down,” said Brian Wanat, CEO of Aon Risk Solutions’ Financial Services Group. “But with many insurance carriers barely breaking even and a low interest rate environment, some may be forced to try to gain rate or move away from writing those classes of business.”

Brian Wanat, CEO, Aon Risk Solutions’ Financial Services Group

A.M. Best’s latest special report on PL said that key coverages continue to be impacted by “more than ample capacity and competitive pressure on rates, and terms and conditions.”

“Beginning in Q1 2014, the influx of additional competitors in the professional liability market space has slowly but steadily driven rates downward,” the report read.
“In addition, the E&O marketplace is still trying to get its arms around the impact of large data and privacy-related losses affecting the retail and health sectors, along with other technology losses that have breached the six-figure threshold.”

The ratings agency expects PL markets to remain robust in 2017, with heightened competition in D&O and E&O specifically.

The Growth of Cyber

Cyber insurance is big business, not just in America but globally, with total premiums reaching $2.5 billion last year and expected to climb to $10 billion by 2020, according to Willis Towers Watson.

The middle market has become extremely competitive with explicit grants of coverage for ransomware and social engineering in stand-alone cyber forms as more first-time buyers enter the market.

Bob Parisi, managing director at Marsh FINPRO, said that the biggest challenge facing the PL market was the changing way companies do business and interact with their customers, vendors and trading partners, as well as how that risk is underwritten.

“After the latest WannaCry and Petya attacks, companies are a lot more wary and have been focused on their cyber security and controls,” he said. “Technology has skewed everything and added a layer of risk that wasn’t there 20 years ago.”

Parisi, moderating the “Business Interrupted: An Alien Concept?” panel at PLUS, added that insurers expanded their coverage in response to the proliferation of cyber attacks.

Matthew Prevost, vice president of Chubb Financial Lines, said cyber impacted all PL lines, highlighted by the recent wave of Petya and NotPetya attacks.

“After the latest WannaCry and Petya attacks, companies are a lot more wary and have been focused on their cyber security and controls. Technology has skewed everything and added a layer of risk that wasn’t there 20 years ago.” – Bob Parisi, managing director, Marsh FINPRO

“There’s not one line that ‘cyber’ doesn’t touch now, and companies and underwriters need to understand explicitly how it interacts with their business,” he said.

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Prevost, moderator for the “Ransomware Attacks! A Survival Guide” panel at PLUS, said that organizations can mitigate against cyber attacks by backing up their data both on and off line and by regularly patching to keep it updated.

“More broadly speaking, a company needs to be aware of both the internet response to an attack and their own risk management strategies,” he said.

“They need to recognize what to do in the event of an attack, whether it’s an individual device or a network-based ransomware attack.”

Boardroom Risks

D&O direct written premiums remained flat at $6.4 billion for the third straight year in 2016, with AIG maintaining the biggest share of 15 percent, according to Standard & Poor.

While loss ratios improved slightly, the WTW report expects securities class action filings to increase with around 500 expected this year; almost double the 270 recorded in 2016 and well above the 20-year average of 188.

Pharmaceutical industries were the hardest hit sub-sector, accounting for one quarter of the 125 reported filings so far this year, said WTW.

Geoff Allen, executive vice president, national professional services practice leader at WTW’s FINEX North America, who works predominantly with law firms, said that the biggest challenge facing companies in terms of PL was the rising cost of defending lawsuits.

“Coverage offerings are being stretched at an unprecedented pace while more capacity floods the space.” – Al Fantuzzi, SVP, professional liability, Allied World

“As a result we are seeing a number of cases signed off with significantly quicker settlements because of the cost of litigation,” he said.

“Also, from an insurance perspective, ongoing systemic claims are driving big pricing movements, and it’s hard to see where it’s going to end.”

In E&O, Al Fantuzzi, senior vice president, professional liability E&O at Allied World, said that the immediate challenge was maintaining a core portfolio in a constantly expanding marketplace.

“Coverage offerings are being stretched at an unprecedented pace while more capacity floods the space. The carriers that commit to it with underwriting integrity will be the most positive contributors, which in turn perpetuate opportunities to operate in these segments,” he said.

Workplace Liabilities

EPL rates also remained mostly stable with average primary rate increases of five percent, except in California where increases continue to fluctuate between five and 15 percent, said the WTW report.

The EPL market also remains very competitive with capacity of more than $800 million in the U.S., Bermuda and Europe combined.

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Claudia Costa, a partner at Gordon Rees Scully Mansukhani, said that among the biggest challenges for employers were preventing cyber bullying and policing their employees’ use of the internet and social media.

“There is a definite relationship between what businesses are doing to prevent cyber bullying … and cyber security,” she said. “If employees are surfing the internet, an organization is effectively opening up their server to attack, and I think that’s only going to increase.”

Costa, who will be moderating the “Warning — The Internet May Be Hazardous to Employees!” panel at PLUS, said that employers needed to tighten up their policies on internet and social media usage, and to be more proactive in investigating allegations of online bullying or threats of violence made by an employee.

“Companies need to start treating claims of cyber threats and bullying by employees in the same way they would as with a complaint of discrimination,” she said.

PLUS International Conference 2017

Two-time Super Bowl champion Peyton Manning will take a star turn at this year’s PLUS conference, which will be held at the Marriott Marquis in Atlanta Nov. 1 through Nov. 3.

The former Denver Broncos and Indianapolis Colts quarterback will deliver the opening keynote, sharing strategies for adapting to change. &

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]

More from Risk & Insurance

More from Risk & Insurance

Property

Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]