The Great Balancing Act of 2022: How Can We Use Data to Maintain Business Optimism in the Face of Resilience Fatigue?

By: Bethany Greenwood | May 13, 2022

Bethany Greenwood is the Global Head of Specialty Risks for Beazley. She can be reached at [email protected].

For business leaders everywhere, 2022 is off to yet another rocky start.

The sense of global optimism that was prevalent as Omicron receded and the pandemic drew closer to a conclusion has been tempered by the new challenges presented by the war in Ukraine.

Even without these major global factors, most businesses have entered 2022 with myriad complex challenges to manage, from skyrocketing inflation to the Great Resignation.

The balance between renewed confidence and professional exhaustion has never been greater.

War notwithstanding, as the global economy emerges from the pandemic, business leaders are largely optimistic, expressing confidence that they will be more resilient in 2022. Our Risk & Resilience study, conducted in 2021, revealed that most organizations have leveraged the pandemic to improve operations from the ground up leading the vast majority (84%) of business leaders to believe they will be more resilient in 2022.

But such high levels of optimism do not mean that business risks have gone away.

Indeed, over a third expect that supply chain and business interruption concerns will dominate boardroom agendas and that employer and reputation risks will prove challenging.

Compounding the problem, industries that have been hardest hit during the pandemic, including health, retail, travel, education and manufacturing, are at risk of resilience fatigue.

Facing ongoing high levels of staff shortages, complex logistic challenges, and the need to re-shape the workplace culture to respond to different staff, supplier and client expectations, it may be more challenging than ever to continue to gamely keep all of the balls in the air.

Against this backdrop, there can be little doubt that the complex and highly integrated risk environment will drive a sharp rise in claims severity, with settlement amounts far exceeding previous levels.

As this threat grows, clients will likely demand improved granularity around how insurance will respond. The industry will want to be clear at this time that it is not inadvertently including COVID-19 risk in policies.

COVID Is Supercharging Employment Risk

One area where COVID-19 is expected to have a significant impact on business risk profiles is employer liability. In a world where there are no longer any reliable ‘right’ answers, we may expect to see an increase in COVID-19 claims, including challenges over vaccine mandates in the workplace, wrongful termination, discrimination claims and even harassment in terms of working practice expectations.

It is concerning therefore that our research reveals a low executive perception of this risk, with employer risk ranked top by a median of just 11% of business leaders on both sides of the Atlantic.

In our view, this may be short sighted. We anticipate that cases will likely start with employment practices liability and discrimination issues.

But if the trend becomes wider spread, this could easily morph into management liability or boardroom issues if we see COVID-19-related class actions.

ESG Reporting Is a Minefield

Rising stakeholder expectations around environmental, social, and governance (ESG) concerns and new reporting standards are another area of complex risk that is re-shaping corporate strategy and re-setting relations with investors and shareholders.

Pressure to provide better guidance about ESG credentials is both an opportunity and a risk.

On the one hand, new regulations may clarify what is expected of companies. On the other, they pose risks that businesses, in their haste to comply with new regulations, exaggerate their green credentials or release inaccurate, misleading or misstated information.

Any companies that miss regulatory or self-imposed targets could potentially face litigation and even companies that succeed in achieving their ESG goals will face the risk of being accused of greenwashing, making this an area we are increasingly conscious of in our underwriting.

Supply Chain Concerns Dominate

Supply chain risk is ranked high by business leaders in our research, and resilience levels are relatively low. But with economists predicting that supply chain challenges are likely to persist throughout this year and potentially even longer.

There is a clear threat that companies which are badly prepared will see valuation impacts in 2022.

Supply chain challenges, labor shortages and rising costs present real potential to drive claims activity as well as resulting losses. A major concern is reliance on specialized staff, who may be over-stretched or burnt out, or who may be covered for by under-trained substitutes, feeding into a worsening claims picture.

When valuations fall, it is inevitable that shareholder actions against directors will follow, something that may push supply chain issues even higher up the boardroom agenda as we look further ahead.

Traditional supply chain insurances might include contingent business interruption covers — such as lost income or extra expenses — but the real value of insurance is likely to come from more than traditional risk transfer policies.

Insurance Response to Complex Risks

Mitigating risk is no longer about responding to isolated incidents, nor will it be possible for companies to do it alone. In this climate, corporations will look to insurers to step in and help mitigate a raft of business risks.

These difficult market conditions will test the creativity of the insurance market and the resolve of some market players.

We anticipate working with insureds across industries to pool and interrogate data that in time may support a hub of centralized services adding risk management value, surrounded by more traditional risk transfer mechanisms.

This kind of integrated response will be essential as insureds look for long-term insurance partners with the expertise and insight to help them navigate the shifting sands of liability in what is an undeniably a more complex business risk landscape.

How the current sense of business optimism will balance out with a pervasive level of resilience fatigue remains to be seen.

Throughout the highs and lows, the insurance industry must continually seek new opportunities to support them in addressing and mitigating complex risk. &

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.