Do You Know Who Your Partners Are? Third Party Incidents Impact Almost Every Business

According to one report, 83% of organizations experienced a TPA incident in the last three years but only 1% feel they are 'optimized' to managed third-party risk.

By: Emily Spennato | October 31, 2019

Business relationships are a lot like holiday celebrations with extended family and friends; the more people that are involved, the more complicated the ordeal becomes. More guests means more shopping and cooking, occupied guest bedrooms and conflicting political opinions that only come to light after the eggnog is poured.

Only the host knows the extent of festive chaos that ensues behind the scenes.

Like the host of a holiday party, the responsibility of managing the risk of global organizations is usually left to boards and executives. However, it’s the shareholders that will feel the affects if anything goes awry.

Extended enterprise risk management (EERM) is defined as the practice of anticipating and managing exposures associated with third parties across an organization’s full range of operations, including third-party driven value.

“An extended enterprise is essentially the ecosystem that an organization operates in beyond their four walls,” explained Dan Kinsella, managing partner and U.S. and Americas extended enterprise and third-party assurance leader, Deloitte & Touche LLP.

Dan Kinsella, managing partner and U.S. & Americas extended enterprise and third-party assurance leader, Deloitte

“Our research shows that those ecosystems are ever-increasing year after year, both in transactions and volume of relationships.”

According to Deloitte’s 2019 annual global survey on Extended Enterprise Risk Management, an expansion of a business ecosystem brings an expansion of associated risks that need to be accounted for.

But as networks of connections are expanding, the umbrella of risk management is not opening fast enough to cover them.

As reliance on relationships with outside organizations increases, so do the associated risks — in turn making it crucial that organizations are properly investing in EERM.

Organizations must have visibility into risks that are posed by the extended enterprise — for those third, fourth and even fifth parties –or risk losses.

Minding the Gap

While countless organizations engage in third-party relationships, there are few that consider the risks those relationships might foster.

According to the survey, 83% of organizations experienced a third-party incident within the last three years of operation, yet only 30% expressed interest in recruiting junior EERM talent. Overall, 1% of organizations felt they were “optimized” to manage all third-party exposure.

The difference in these percentages illustrates that, when it comes to implementing extended enterprise risk management, there is a disconnect between the development of the idea and the execution of the strategy.

While most organizations experienced the pain of third-party shortcomings, less than half are actively seeking to develop the skills that will be required of future EERM professionals.

The professional talent required to manage a large web of partnerships is not developing as fast as EERM strategies are being applied.

“There are not enough people out there who see risk management with this lens. The reality is and the future is that people who have this set of skills will be increased and enhanced because of the demand to drive more consistency and better results for this ecosystem,” said Kinsella.

Streamlining Communication

In order to successfully manage extended parties, there must be open communication. Dialogue is often blocked by data silos, discontinuous monitoring and use of third-party subcontractors.

Technology is making the goal of streamlining information through all platforms more attainable; 56% of organizations are using or intend to use cloud-based platforms for EERM and 45% are using or intend to use robotics process automation.

Federated structures are becoming the most popular operating model for EERM, focusing on shared services and centers of excellence.

This is the most time and cost-effective use of central oversite, according to Kinsella.

“As opposed to just creating something new, you just kind of connect to the centers of excellence that are out there. You bring it together via a process and technology backbone as opposed to fully centralizing the resources.”

Implementing EERM for Long-Term Value

From an organizational perspective, it’s easy to see how the disconnect between the development and implementation of EERM emerged. Despite its extended history, insurance does not feel the impact of governmental regulations like the financial sector does.

“Banking got regulated on third-party risk management. Insurance is just now coming into it,” said Kinsella.

Like other industries, insurance is attempting to manage EERM from a perspective of long-term value. It’s likely that next year’s survey results will show that implementation strategies are slowly but undoubtedly catching on, even if the immediate impact of them is not substantial.

Preparedness and adaptive strategies that will likely emerge include smarter contracts, better management of affiliate risk, and reliance on operating models.

“Incidents are still rising which means we’re not doing enough,” said Kinsella. “While it will never be perfect, the impact of these events will begin to lessen. They will still happen, but we will be ready.” &

Emily Spennato is a former staff writer with Risk & Insurance.

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.