Climate Change and ESG Are Valid Concerns, But That Doesn’t Mean Risk Managers Should Panic

By: Lou Gritzo | December 14, 2021

Dr. Louis Gritzo is vice president and manager of research with FM Global. He oversees a team of scientists specializing in fire, explosions, natural hazards, risk and reliability, and cyber in order to prevent property and business interruption losses. In 2015, he was as an invited panelist in two sessions at the UN World Conference on Disaster Risk Management in Sendai, Japan. He can be reached at [email protected].

In February 2022, the Intergovernmental Panel on Climate Change (IPCC) will issue its Working Group II report, focusing on the impacts, adaptation and vulnerabilities facing the world from a changing climate.

And while that report will spark discussion as to how society will deal with those changes, for risk managers, the challenge is how to be resilient to them —both financially and otherwise.

For many organizations around the world, some of the most visible impacts of a changing climate are the ones that they should be most concerned about.

Extreme weather, flooding, wildfires that can cause property damage and supply chain disruption are not new to risk management, but the uncertain extent to which these hazards will change is uncharted territory.

Notably, data and models show that wet areas of the planet are becoming wetter from extreme rainfall and increasing flood risk, while dry areas are becoming drier, increasing drought and wildfire risk.

Additionally, while the data on how a changing climate will affect hazards such as windstorms and hurricanes are less certain, some studies forecast that a warmer world will result in more severe hurricanes in the future.

Fortunately, today’s risk managers have the power to control the destiny and resilience of their organizations. We already know the potential perils from the changing climate and where they are the most significant.

The question is, where to invest time and effort to reducing risk in a way that will make the organization most resilient?

Start with Flood

The absolute first and foremost peril to address is flood.

Fortunately, there are many good options for reducing the risk from flood. These include physical barriers to keep water away from and out of buildings, and good emergency response plans.

When combined, these strategies go a long way to help companies control their own destiny from this changing hazard.

Then Comes Fire

Second, wildfires are posing increased risk to businesses.

Drier weather and the accumulation of forest materials produce more severe fires that put an increasing number of locations in proximity to forested regions at risk.

To protect against the damage wildfires can cause, using noncombustible construction material is the best choice.

In addition, keeping an open, green space between buildings and forest materials, sealing openings, and making sure to remove dry leaves, pine needles or other light materials that can be ignited by flying embers will make a huge difference in mitigating wildfire damage.

Where Reducing Risk Meets ESG Efforts

The main hazards that are exacerbated by a changing climate aren’t new, and with the addition of new innovative measures, protecting against damage or business interruption is easier than ever. The challenge for risk managers is to recognize that the frequency and the severity of flood and wildfire is increasing and more in some areas than others.

Making the right reduction choices has never been more important.

At the same time, company leadership is increasingly seeking to achieve environmentally-friendly measures to improve sustainability as part of corporate ESG efforts.

For risk managers, specifically understanding your company’s sustainability objectives, what they include and whether are they being implemented in a risk-conscious fashion is critical. Such steps might include things like installing solar panels or enhancing insulation on buildings to be more energy efficient.

Risk managers are the ones to ask what new hazards are being introduced by these ESG measures and can help define the right means of achieving them without adding risk. The relationship is even broader — any measures that reduce damage improve a company’s sustainability posture by reducing the environmental impact of the damage, disposal and replacements.

Finally, Addressing Climate Change with Confidence

Overall, it is vitally important that risk managers don’t get caught in the uncertainty trap surrounding the changing climate — “Since we don’t know exactly how it’s going to manifest itself, we don’t do anything.” That is the worst possible outcome.

The Earth’s climate is changing and so are the property-related risks.

That’s why it’s critical to plan and take steps to counter increasing climate perils now to remain resilient in the future. The most important thing is ensuring you have the fundamentals of risk reduction in place, because no one knows exactly how things will manifest themselves down the road.

It’s worth remembering, rather than trying to prepare for the exact climate-related event that may strike your facility or distribution center, it’s better to prepare more broadly for the types of perils that property may face. Doing so shows time and time again that this is the best way to be resilient in both the current world and in the future. &

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.

By: Risk & Insurance | April 3, 2024

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.