5 of the Most Demanding Global Risks to Prepare for in 2020

By: Les Williams | January 6, 2020

Les Williams, CRM, is Cofounder and Chief Revenue Officer of Risk Cooperative. He holds a B.S. in mechanical engineering from the University of Virginia and an MBA from Harvard Business School. Prior to joining Risk Cooperative, Les served in various institutional sales positions at SoHookd, JLL, and IBM.

According to the World Economic Forum’s (WEF) top 10 business risks of highest concerns globally released this past October, the top 10 global risks are:

Fiscal crises
Cyber attacks
Unemployment or underemployment
Energy price shock
Failure of national governance
Profound social instability
Data fraud or theft
Interstate conflict
Failure of critical infrastructure
Asset bubble

The survey was conducted by interviewing global executives in the following regions: East Asia and the Pacific, Eurasia, Europe, Latin America and the Caribbean, Middle East and North Africa, North America, South Asia, and Sub-Saharan Africa.

While each of these risks are equally important to organizations going into 2020, five of these risks are united by one common theme: Their impact on international business operations.

Fiscal crises, failure of governance, social instability, interstate conflict, and cyber attacks represent risks that entities should be most careful of when conducting business abroad. These risks are interconnected, with each having an impact on the severity and likelihood of the others.

1) Fiscal Crises

According to the International Monetary Fund, global growth remains sluggish at 3.2% in 2019, projected to rise slightly to 3.5% in 2020.

Lower growth, combined with a record increase in debt levels of the world’s seven largest economies, has increased the likelihood of fiscal crises resulting in this risk being ranked #1 in the WEF’s report.

That this risk overcame climate change or the threat of pandemic risks as the #1 perceived risk among survey respondents suggests there are some severe perils hiding in organizational blind spots — or that a certain “disaster fatigue” may have set in along with the sense that little can be done to alter the course of these types of events.

2) Social Instability

In response to lower growth and rising debt, governments typically respond with higher taxes and spending cuts to shore up weakened balance sheets.

These measures tend to impact members of society clinging to the lowest rungs of the socioeconomic ladder. This population is more sensitive to cuts in public services and, many times, are especially dependent on certain industries impacted by a weakening labor market.

Examples of social instability do not live solely in emerging market economies; we need look no further than the recent anti-government protests in France led by the gilets jaunes or “yellow vests.” Rising fuel taxes and stagnant wages in a high cost-of-living environment are some of the grievances expressed by the protesters. Many of these protesters are middle-class citizens, making the situation even more caustic.

3) Failure of National Governance

The growing threat of financial crises puts an increasing strain on a government’s ability to provide services for its citizens, creating social instability, which in turn causes citizens to lose faith in their respective governments.

Lack of transparency among public officials (corruption), lackluster delivery of social services, income inequality and rampant crime are all factors contributing to this “no-confidence vote” amongst the populace in certain regions around the world.

Primavera Latinoamericana, or Latin American Spring, has given rise to riots by citizens of Colombia, Chile, Ecuador and Bolivia, among others. This trend is expected to continue well into 2020.

4) Interstate Conflict

Interstate conflict is possibly the most insidious risk facing entities and their international operations.

We need look no further than the recent developments between Iran and the U.S.

Shortly after the New Year, U.S. President Donald J. Trump ordered a lethal missile strike on a convoy of vehicles carrying General Qassem Soleimani, an influential Iranian military leader, in Iraq’s Capital. While international reaction has varied, this incident may mark the beginning of not only a military campaign between the two nations, but also an advanced cyber warfare campaign given the history of past skirmishes.

Evidence of this has already begun, with a group of hackers claiming to be from Iran breaching the website of the U.S. Federal Deposit Library Program.

5) Cyber Warfare

A new risk that must be accounted for involving cyber is the act of war exclusion found on many property and other insurance policies.

Merck Pharmaceuticals and food giant Mondelez were a few of the hundreds of global companies directly affected by the 2017 Russian-born NotPetya cyber attack. According to The Insurance Journal, Merck’s direct and indirect losses totaled $1.3 billion, and over 30 insurers and reinsurers denied coverage due to Merck’s property policies specifically excluding acts of war (even though Merck was not a willing combatant in the attack, rather an innocent bystander).

While Merck took many of these insurers to court, such as AIG and Allianz, the fallout from the breach continued as the pharmaceutical giant struggled to reopen several production facilities that were shuttered.

This will not be the first time businesses and universities will be exposed to this opaque exclusion, and we can expect this conundrum to arise again as Iran and other actors are expected to launch more cyber attacks on the U.S. and other targets, which may hone in on “easier prey” or soft targets.

Managing the Risks by Managing Policies

While the aforementioned risks are enough to make any entity think twice before planning travel or conducting business globally during 2020, it is wise to review certain insurance and enterprise risk management policies.

Event cancellation coverage is very comprehensive, covering perils such as the death of a foreign leader, threat of communicable disease, threat of natural disaster, act of war, act of civil war, political intimidation, strikes and civil commotion, riots, terrorism and more. The ability to pivot or cancel an international trip due to these unforeseen perils is something event cancellation coverage provides.

Political risk insurance is especially important in 2020 given the current geopolitical environment. This insurance covers perils like government confiscation of property, civil commotion, currency inconvertibility, terrorism, war and import/export embargos, among others.

The actual exercise of reviewing a current cyber policy or procuring new coverage allows an organization to remain current with the most recent threats in this fast-moving risk landscape. There are several key coverages every comprehensive cyber policy must contain, such as security breach response, extortion, business income interruption and reputational harm.

The act of war exclusion must also be specifically addressed in policies, or organizations must be made aware that their potential economic costs due to a war risks exclusion will go unhedged by insurance.

Equally as troubling is the situation known as “silent cyber,” the unknown exposure in an insurance portfolio created by a cyber risk that has neither been excluded nor included, therefore creating a scenario where insureds are tacitly at risk.

Organizations must consult their risk managers/insurance brokers to ensure that their policies specifically address acts of war relating to cyber and are not silent regarding cyber threats.

Event cancellation, political risk and cyber insurance are coverage classes that simply place a fixed price on the uncertainty following an unfortunate event. These coverages, in concert with proper planning, will help make organizations more resilient on the global stage in an uncertain 2020. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.