A Willis Towers Watson perspective
Companies typically rely on insurance and risk transfer methodologies to effectively protect against risk. With the shift in market conditions, combined with rapid change in the risk environment, it is important for companies to understand how insurance carriers have pivoted and what strategies can be developed to mitigate surprises.
We are several years into the hardest market observed in decades. Double-digit premium rate increases, year after year, have been common for property, financial lines, umbrella and most recently cyber coverage. For difficult segments and challenged clients, we’ve seen triple-digit rate increases. In most geographies, the local markets have been more stable, but rates have tightened, and some companies require international markets in London, Bermuda, Singapore, and China to find adequate capacity.
This hard market is characterized by lasting underwriting discipline that was unheard of in previous hard markets. This is largely due to the increased use of analytics by underwriters and their leadership to reduce uncertainty and to better model exposures.
So, what is on the horizon for TMT companies accessing the insurance marketplace?
In 2021, we expect continuation of a two-tiered marketplace. There will be more capacity and an easing of premium rate increases for “good” TMT risks – with “good” defined by product line. Although we don’t anticipate a return of soft market conditions in the short term, we predict growing capacity and a deceleration of rate increases for these “good” risks. For the second tier, 2021 is likely to be another difficult renewal year of double-digit rate increases and tight capacity. This tier includes clients who are in tougher industries, those who have significant catastrophe exposure, those who have had losses, and those who have not adequately addressed hazards and safety issues. Specialty lines, such as for example Technology Errors & Omissions are particularly going to prove challenging.
Hard pricing conditions will persist for most TMT companies because there are still fundamental issues plaguing the market. These conditions include:
In addition, the COVID-19 loss picture is still murky. As it stands today, the global pandemic will be one of the largest insured loss events in history, with analysts predicting a $60 billion - $80 billion loss to the industry.
The following overview includes forecasts and predictions across multiple lines of insurance from the Willis Towers Watson 2021 Spring Update Report. Figures referred to in the text below can be verified in this report unless other sources are also sited.
Until underwriting profitability returns, expect little rate relief, with continued pull-back in sublimits and tightening of policy wordings. The demonstrable increase in the frequency and severity of natural catastrophes across the world appears to be systemic — perhaps driven by climate change. The persistent increase in man-made property damage losses — fire, boiler and machinery, etc.— is also problematic and probably caused by short-sighted business practices, but those can be addressed. Natural catastrophe and major losses globally are impacting the global Property insurance markets significantly. Companies in the TMT sector are in many cases significantly exposed to the natural catastrophe perils:
Given the dramatic increase and severity of ransomware incidents during the pandemic, organizations should be proactive in assessing their cyber resilience and be able to demonstrate this resilience to underwriters. Heavily exposed industries, including large media and technology companies, are likely to see rate increases on the higher side of our predicted +10% to 30% range.
Regarding particular risks surrounding remote work environments, some cyber policies may have coverage gaps or imprecise wording that insurers can exploit to argue against coverage ...
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TMT Casualty Due to various factors continuing to worsen loss trends and underwriting profitability, the commercial liability marketplace remains hard for key countries such as the US. The market is less firm for non-U.S. casualty required by TMT companies, but the market for international casualty has begun to see significant impact from recent social and economic trends.
TMT Product Recall Pressure on manufacturers to focus on safety has never been greater as retailers ban unsafe products. Technology products will play an increased role in various safety initiatives that are being released in early 2021 leading to increase in focus and likely impact on terms and conditions available.
TMT Terrorism & Political Violence Increased civil unrest driven by political and ideological polarization puts property coverages under scrutiny. Technology, media and telecoms companies have been significantly impacted in a number of hotspots across the globe. Examples to illustrate this includes the unrest in Myanmar leading to the new military government orders to temporarily block internet access that impacted a Norway’s Telenor and political violence impacting foreign direct investments in Pakistan’s telecom sector.
TMT Employment Practices Liability The Employment Practices Liability market has shifted to a hard market where underwriters are focused on many priorities.
Technology Errors & Omissions Professional and technology service organizations should be prepared to discuss with brokers and underwriters how they have been impacted by COVID-19.
TMT Fidelity/Crime Although social engineering has been around for several years, lately it has garnered greater attention with more severe and frequent losses, including for electronic crime.
TMT Surety Due to various factors continuing to worsen loss trends and underwriting profitability, the commercial liability marketplace remains hard for key countries such as the US. The market is less firm for non-U.S. casualty required by TMT companies, but the market for international casualty has begun to see significant impact from recent social and economic trends.
TMT Trade Credit Pressure on manufacturers to focus on safety has never been greater as retailers ban unsafe products. Technology products will play an increased role in various safety initiatives that are being released in early 2021 leading to increase in focus and likely impact on terms and conditions.
TMT Special Contingency Risks. Kidnap & Ransom The special risks insurance markets continue to reduce their exposure to cyber extortion events. Nigeria suffered the second highest total of incidents, with the Democratic Republic of the Congo (DRC), Niger, Mozambique and Mali also featuring in the top 10, underscoring the risk of kidnap on the African continent. Syria and Iraq have re-entered the top 10, following a spate of recent incidents.
Traditional political flashpoints compounded by COVID-19-induced financial distress has led to elevated risks. Recently there has been a sea change in the relationship between the technology sector and politics. Like many other sectors, the technology industry has grappled with the consequences of rising economic nationalism and trade wars. Unlike other sectors, the technology sector has increasingly become a political target as a result of political perceptions – some would say misperceptions – of the market dominance of certain companies and the social impacts of new technologies.
COVID-19 has created a superstorm for many multinationals. Traditional political flashpoints compounded by COVID-19-induced financial distress has led to political violence, export bans, confiscations, selective discrimination and restrictions on movement of capital. We advise global companies to take a proactive approach to their global portfolio and seek political risk coverage with urgency, as market capacity is shrinking in some cases and rates are trending upwards.
ART solutions are not immune to the same economic pressures faced by their traditional counterparts, and these pressures drive ART underwriters to act conservatively. When it comes to ART deals, this conservatism is manifested as a preference for simplicity over the cutting edge. Having said that, TMT companies with alternative risk transfer deals, whether simple, novel or innovative, supported by robust analytics and negotiated over realistic timeframes, fare better.
As economic activity stabilizes and the hard market continues, we expect the rush of TMT companies to form and re-engineer captives will continue.
The hard insurance market and the economic uncertainty caused by COVID-19 are putting every financial decision under the microscope, driving many insurance buyers to feel they must choose between reducing expenses and satisfying risk protection expectations. The use of data and analytics to help TMT organizations best respond to these challenges is accelerating. TMT organizations increasingly want evidence that their insurance spend creates value for their organization. They are finding that risk analytics provide the insights they need to measure that value and set insurance priorities.
Knowing the insurance market and how underwriters perceive TMT risk can help companies achieve the most desirable outcome. Moreover, there are certain positive trends that bear mention, including new capacity gained from new market entrants and efforts by existing carriers looking to write more aggressively at rates they view as being at a sustainable level.
Overall, however, outcomes remain unpredictable as markets continue to remediate their portfolios while trying to grow in profitable areas and maintaining underwriting discipline at the same time as competing for core clients. This is particularly the case for specialty lines, such as cyber and technology errors & omissions.
As companies deal with change, take strategic risks, alter business models and/or converge technologies, there is an impact to the overall cost of risk. Successful strategies will include review of the organization’s overall risk tolerance, differentiating exposures and “risk” to the markets based on solid evidence, implementing safety and loss mitigation controls and most importantly utilizing analytics and quantitative analysis to provide risk differentiation.
Regarding particular risks surrounding remote work environments, some cyber policies may have coverage gaps or imprecise wording that insurers can exploit to argue against coverage.
For example, there has been a sharp increase reported in two types of cyberattacks during the COVID-19 crisis: (i) ransomware attacks, where hackers use malware to encrypt a company’s data, then demand a cryptocurrency payment to provide decryption keys; and (ii) fraudulent transfer schemes, where hackers send forged emails to targeted employees to induce them to transfer funds to offshore accounts. These events may not fall within the standard insuring agreements and often must be added by endorsement, and the specific wording of the endorsement could determine whether coverage is available.
Many cyber policies include exclusions for negligent network security practices which, of course, is contrary to the very purpose of cyber insurance. We have seen exclusions for delayed software patches, use of unencrypted portable devices, and design errors affecting network traffic capacity. Such exclusions can be highly problematic, particularly during COVID-19 when network IT resources are strained.
The California Consumer Protection Act (CCPA) took effect on January 1, 2020, coinciding with Covid-19’s arrival in the United States. This statute, considered to be the nation’s toughest consumer privacy law, imposes new requirements regarding data security practices, third-party sharing, and disclosure of collection policies. For many companies, CCPA compliance required costly investment in new data systems and processes.
These burdens could not have come at a worse time for U.S. businesses that struggle with limited cash flow to maintain fluid and effective IT networks.
Violations of the CCPA can result in civil claims, statutory damages, and regulatory investigations. It is important for corporate policyholders to ensure that their cyber insurance policies provide adequate coverage for these new regulatory exposures.
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