Insuring the Technology Leap: Can Risk Transfer Keep Up?
It’s 2050 and an executive at a commercial insurance carrier starts her day by calling an Uber to take her to work. The autonomous vehicle shows up promptly at 8:30 a.m. She checks her email while being whisked to her San Francisco-based office.
Once there, she opens her laptop, connects to an augmented reality platform and has a meeting with an insured in New York.
Both the executive and the insured interact with holograms of themselves that mirror their real-life movements, so it feels like they’re speaking in-person even though they’re thousands of miles apart.
These technologies may seem straight out of an episode of “The Jetsons,” but many of them exist—even if only in nascent forms—today.
Tesla debuted its first autopilot features in 2015 and Ford more than doubled its investment in autonomous vehicles in 2021, per reporting from Wired and Reuters respectively. Meta and Microsoft CEOs Mark Zuckerberg and Satya Nadella are calling the metaverse—a digital world that mirrors our own—the future of the internet.
These tools are revolutionizing the ways we live and work—and they’re coming sooner than you think.
Globally, the growth of digital wallets, paperless lending and digital currencies pushed the FinTech segment of the market to a $7.3 trillion in value in 2020, according to reporting from Yahoo Finance.
The pandemic led to explosive growth for virtual communication platforms like Zoom, Slack and Microsoft Teams, and other tools will likely follow.
“Tech companies are moving,” said Tom Quigley, U.S. technology practice leader, Marsh. “They’re getting into a lot of businesses, and the more and more technology becomes ubiquitous, the more we’re getting into a whole range of exposures.”
Carriers are already scrutinizing cyber, technology errors and omissions (E&O) and directors and officers (D&O) risk in these fast-growing companies. Hardening markets have tech companies looking for alternative risk transfer solutions or, in some cases, disrupting the insurance industry as we know it.
We’re Living in a Digital World
Many of the technologies being developed today can be divided into two groups: Those with physical products and those with digital products.
Autonomous vehicles are the predominant example of emerging physical technology. They range from self-driving cars to autonomous trucking fleets to AI-operated forklifts.
“I’ve worked since about 2015 with every mode of autonomy that you can think of: sidewalk delivery bots, robotaxis, self-driving trucks, industrial automation, teleoperation of forklifts or mining,” said Steve Miller, broker and innovation lead, Insurance Office of America.
“I think what we’re going to see is the foundations of the metaverse and the opportunities that produces,” said Michael Brunero, CFC Underwriting’s head of tech, media and IP.
Though the metaverse is a few years away from practical application, other forms of technology and AI are already disrupting long-established industries.
Take the uses of blockchain technology in the insurance industry.
Blockchains can store smart contracts, which are automatically executed when a certain set of predetermined conditions are met.
These automatically executing insurance policies could make property and casualty insurance companies more efficient by reducing the time between when a claim is filed and when it is paid.
Getting Underwriters Comfortable with Disruptive Tech
New technologies may be popping up in every sector — even insurance — but that doesn’t mean carriers are comfortable underwriting the risks.
Marsh’s Global Technology Industry Risk Study found that over the past few years, tech companies have seen price increases for cyber, tech E&O, D&O and casualty coverages (with the exception of workers’ compensation). “The challenge is really getting a legacy financial industry, like insurance, to keep pace with the innovation of disruptive technology,” Miller said.
Part of the reason underwriters are uncomfortable with the new exposures presented by tech companies is a lack of historical data. When Miller first pitched coverage for autonomous vehicles in 2015, he remembers underwriters balking at the request.
“They laughed, because they didn’t have any basis for understanding it,” he said. “The insurance industry now has a hundred years of the metrics on how humans drive vehicles, and they’re very comfortable with that data, because it’s billions and billions of miles. And they don’t have that for autonomy.”
“Underwriters need to become more innovative in the way that they’re providing products and solutions and brokers need to be open minded to selling those solutions. They might not be what they’re familiar with, but there’s a reason for that. The world moves on and so do the solutions we need to provide.” —Michael Brunero, head of tech, media and IP, CFC Underwriting
Another factor causing hesitancy amongst carriers is a lack of familiarity with how these digital tools work.
Sticking with self-driving cars, many underwriters feared that autonomous vehicles could be hacked and taken over by cyber criminals who would then cause crashes. But Miller said the technology has been programmed to avoid such a risk.
“The way that the systems are designed is there’s a very specific route for input for vehicle actuation, and if there’s a failure or a command that’s not recognized as coming from the right source, the vehicles go into limp mode; they stop. Worst-case scenario, you’re stopping on a roadway. You’re not turning it into a remote-controlled car,” he explained.
“Underwriters need to hear that from engineers, and engineers need to say, ‘Yeah, trust me, step one is to make sure these don’t have that exposure.’ ”
These issues extend to tech tools that make up the virtual world as well. Quigley pointed to social media companies that have pivoted to focusing on the metaverse (Facebook rebranded to Meta last year) as one area where business models have shifted in a way that could make underwriters uncomfortable because of a lack of historic data.
A company that once focused on social media may have a new cyber risk exposure if they start implementing the sale of digital objects using NFTs, or non-fungible tokens, which function like a deed for a virtual product, or if they allow for the trading of cryptocurrencies.
“They’re moving from commerce to e-commerce to social commerce. What does meta commerce mean? What do these online environments mean in terms of new risk issues?” Quigley said.
“If you have an underwriter who is very comfortable with a prior business model, and now we’re stepping into something new, there’s often pushback.”
Cyber: A New Catastrophic Risk
Some lines are facing more scrutiny and pushback from underwriters than others, and cyber is probably the most difficult of all for technology companies.
A spate of ransomware attacks last year has caused cyber insurance rates for all sectors to jump 80 to 100% year-over-year, Risk & Insurance® reported in February. For tech companies, this figure is especially concerning since so many aspects of their business are exposed to cyber risk.
Seventy-two percent of respondents in Marsh’s 2021 Global Technology Industry Risk Study named data security and privacy as their most pressing risk, and 71% said it will be more of a concern within the next three to five years. Another 54% expressed concerns about digital business interruption and an additional 53% named IT resilience as a top-of-mind risk.
The cyber exposures for many tech companies are so great, Quigley likened that to the types of catastrophic loss caused by natural disasters.
“We have a lot of large tech clients where, yes, it’s bad if there’s a fire,” Quigley said, “but the thing that winds up being a very existential risk is their digital infrastructure.”
Beyond the typical cyber liabilities, many tech companies have additional digital risk in the form of tech E&O exposures. Tech E&O policies cover the costs of a lawsuit if a tech company is sued after their software malfunctions for a client or if a mistake is made during their service.
A mid-year market outlook from 2021 published by USI Insurance Services found that tech E&O rates were up 25-50% for typical exposures and 50-100% for optimal risks.
From an underwriter’s perspective, tech companies should be proactively thinking about potential ways their product could malfunction and cause a loss for their clients. That way, they can better present their exposures to carriers on the tech E&O side.
“I think there’s a need for a technology company that’s making a nuanced product to understand that the security controls they are putting in place need to be best practices rather than checking a box,” said CJ Pruzinsky, chief underwriting officer for North America, Resilience Cyber Insurance Solutions.
“That would help me from an underwriting perspective to say, this is a company that knows their obligations within the cyber ecosystem.”
As Growth Soars, So Does D&O Risk
Despite the numerous risks new technologies present, tech companies continue to grow at a rapid pace, putting them at increased risk of D&O claims.
Claims emerge when a tech company promises massive growth then fails to meet those targets. Members of the board of directors may then sue, and a company’s D&O policy would kick in to cover those expenses.
Emerging tech companies have a higher D&O risk than more established companies because their business models are influx.
“Public tech companies are probably more at risk of a claim just because the business models aren’t yet proven out,” said Alex Shklyarevsky, VP, North American public D&O division, Allied World.
“We have a lot of large tech clients where yes, it’s bad if there’s a fire … but the thing that winds up being a very existential risk, is their digital infrastructure.” —Tom Quigley, U.S. technology practice leader, Marsh.
This risk is especially acute for tech companies that go public using a Special Purpose Acquisition Company, or SPAC. SPACs are pools of money gathered with the intention of acquiring a company and taking it public.
Unlike a traditional IPO, which only allows for one year of pro forma financial projections, a business taken public through a SPAC can provide pro forma projections of up to five years. If a tech firm fails to reach these broader earnings projections, it could attract litigation.
“Nascent businesses are attempting to go public without producing either revenues, or certainly, profits. And we’re seeing that with these potential de-SPAC transactions,” said Raymond Ash, SVP of Westfield Specialty. “You can look at the failure to meet expectations as the genesis of a lawsuit.”
“A lot of the claims come from these companies missing revenue expectations,” Shklyarevsky added. “Be transparent. Be realistic about the business model. Don’t hide anything.”
The Insurance Solutions of Tomorrow
Given these challenges, many tech companies report being unhappy with their insurers, and some are looking for alternative solutions to manage their exposures.
“Tech companies’ satisfaction with nearly every form of insurance has fallen in recent years,” Quigley said.
For cyber and tech E&O lines, Quigley said he has seen insureds turn to captives to manage their exposures.
“There’s a trend towards more clients looking at captives because of the pricing in the market,” he said.
But familiar alternative risk transfer solutions like captives aren’t the only places tech companies are eyeing to manage exposures. Tech companies by nature are disruptive, so many are turning to Insurtech and safety engineering companies to help solve these problems.
“What we’re seeing is a growth of interested parties in the space that are autonomy-focused but are not necessarily the traditional legacy insurance players,” Miller said. “Some of that’s Insurtech, some of that’s safety engineering companies working within insurance, and there’s a lot more of that on the horizon.”
But legacy carriers can still keep up — usually in the form of acquiring companies designed specifically to insure tech risks.
In 2018, The Hartford acquired Y-Risk, a managing general underwriter specializing in the sharing and on-demand economy. Y-Risk currently uses usage-based pricing, so an insured’s rate is developed based on its month-to-month exposures.
“Y-Risk is definitely working with unique companies from an insurance perspective. We see this as an opportunity to think different about exposure base for not only the sharing economy, but also for other companies that might benefit from a usage based type of insurance model,” said Andrew Zarkowsky, head of the technology practice at The Hartford.
Ziad Kubursi, head of financial, executive and transactional liability at The Hartford, noted the company has also adapted to cover new exposures for tech companies. He cited tech E&O policies as a prime example.
“You go back 20 years and Cyber & tech E&O were in their infancy stages and continuing to develop to address the growing concerns in the industry and larger commercial segment. As the risks continued to grow and more focus around the exposures in these areas, tech E&O & Cyber are now a large and growing line of business under our division,” Kubursi said.
“Everything has a technology component to it, but we designed and customize our policy form around the evolving professional services that technology companies do. So whether it be consulting, whether it be manufacturing chips, or providing tech consulting services, or running an application, or managing a cloud, these are contemplated and embedded into this tech group.”
Presenting Your Story to Carriers
The good news for tech companies? The way they present their exposures and risk management strategies to carriers can go a long way in helping secure coverages they need.
“We’re in the highest of high-tech, but relationships have never been more important in my brokerage career,” Miller said.
Tech companies should be prepared to detail what their risks are and what they’re doing to address them, especially in lines like cyber, tech E&O and D&O, where they may be facing rate increases. Working with an actuary to get an understanding of your exposures and presenting that data to carriers can be a critical first step.
“What we’re doing is trying to get a firm understanding through actuarial studies of the risk internally and then go with a story to the carriers,” Miller said.
“The challenge is really getting a legacy financial industry, like insurance, to keep pace with the innovation of disruptive technology.” —Steve Miller, broker and innovation lead, Insurance Office of America
Both insurers and insureds should also be open to new ways of managing risk. Since tech is such a disruptive industry, insurance solutions that break with conventional policy forms may be one of the best solutions to ensure risk transfer options exist in the market.
“Brokers and underwriters need to work better together,” Brunero said.
“Underwriters need to become more innovative in the way that they’re providing products and solutions and brokers need to be open minded to selling those solutions,” he added.
“They might not be what they’re familiar with, but there’s a reason for that. The world moves on and so do the solutions we need to provide.” &
Courtney DuChene was recognized as the winner in the “Insurance & Risk Technology Journalist of the Year” category for the Willis Towers Watson 2023 Journalist of the Year award. Her reporting in the above article contributed to her win.