By Archie Whitehead, Tech, Media and Cyber Broker at New Dawn Risk

Network scanning has become a powerful tool for assessing a cyber risk, as it can offer a comprehensive report of a company’s IT environment and highlight key vulnerabilities at the press of a button. Though these scans are highly useful for gathering information, some cyber markets are starting to use them as gospel when evaluating the risk of potential clients. Cyber carriers should be wary of basing their full rationale off network scans, as this method simply cannot account for all the potential exposures a cyber carrier may be vulnerable to while on-risk. 

For example, one major blind spot for network scans is that they do not pick up on a company’s Operational Technology (OT) environment. While this may not be of concern for certain industries, OT does account for a significant portion of cyber exposure in many industries (for example, manufacturing). When OT exposures are not accounted for, the accompanying risk will not be priced accordingly. While this may seem like a great result for the policyholder, who receives comprehensive cover at a cheaper cost, the insurer is putting both themselves and the insured in a precarious situation should a claim arise.

Additionally, network scanning does not take into account a policyholder’s governance – whether that be around culture, the use of employee security training, phishing simulations, or any other tools that can be used to boost prospective clients’ cyber hygiene beyond the realm of IT systems. Once again, subsequent pricing will not accurately reflect the risk at hand when these factors are overlooked. 

As prior experience has shown, when loss ratios increase for these carriers, there becomes a need to determine what is going wrong and what needs to be changed. The dependency on scans as an underwriting process poses a hard question: have we learned anything from the last market cycle? Will the same occur again, with insurance companies unexpectedly non-renewing accounts, or unjustly increasing premiums even though the insured has not done anything to warrant such an increase? 

If the cyber claims environment deteriorates once more in frequency and/or severity, there is concern that these carriers that have gained a large market share by warranting cheap rates through their scan reports will leave a huge gap in the market, potentially leaving clients stuck without a solution. By extension, this can cause anxiety around having to move policies to alternative carriers and essentially leave both insureds and brokers out to dry. Brokers may be held liable and will have to explain to clients that their cyber policy was placed with a carrier that did not account for all potential exposures. 

Ultimately, network scans themselves are not the concern, but the use of such as a substitute for traditional risk assessment could become a major issue. These reports should be used in addition to the other underwriting tools within a cyber insurer’s arsenal; the danger comes in thinking they can replace human rationale and insight. Those in the cyber market should brace themselves for when this scanning bubble may eventually burst… 

02 September 2021

New Dawn Risk Group Limited, the international specialty insurance broker, announced today the appointment of Angus Simpson as a non-executive director.

Max Carter, CEO of New Dawn Risk, said: “We are delighted to welcome Angus Simpson to our board.  He brings with him a rare depth of board-level experience in the independent London market broking sector, and we have no doubt that he will provide valuable insights and support to our management team.  New Dawn Risk is strongly positioned to become an increasingly influential participant in the specialty liability market, and Angus will be a major asset in helping us to achieve this.”

Commenting on his appointment, Angus Simpson, said: “I am hugely excited to be joining the Board of New Dawn Risk at what is, unquestionably, a time of immense opportunity for specialty, privately held, independent brokers in the London market. New Dawn Risk is committed to broadening the range of products and services that it can offer to its clients and is now very well positioned to grow its business over the next few years.”

Angus has a wealth of experience with a career spanning 35 years in the insurance industry. He has set up two businesses, an insurance broker and a Managing General Agency underwriting specialist personal lines business. Earlier in his career, he was a director of a Lloyd’s Broker and ran the Central Broking team at Aon Risk Solutions. Angus has also served as a non-executive director for Kite Warren and Wilson Limited, a Lloyd’s insurance and reinsurance broker.

Notes to Editors

Established in 2008, New Dawn Risk is a specialist insurance broker providing dynamic advisory solutions. We focus on complex, international liability and other specialty insurance and reinsurance. Clients large and small profit from our expertise, creativity and responsiveness – from risk assessment through to claims.

The article below, by Nicky Stokes, Head of Management Liability and Financial Institutions at New Dawn Risk, was originally published in Insurance Day in July 2021.

It is a tough time to be a di­rector or officer. Few can remember an operating en­vironment characterised by quite such a level of uncertainty and array of emerging risks. At the same time, for those looking to transfer some of that risk, the directors’ and officers’ (D&O) lia­bility insurance market has been going through a long overdue pe­riod of price corrections, coupled with restrictions on coverage.

The full impact of Covid-19 has yet to be felt and is unlikely to be until governments begin to wind back the unprecedented levels of financial support they have put in place. With the near-term eco­nomic and political outlook still uncertain, D&O liabilities linked to company insolvencies are like­ly to increase.

Of course, the pandemic has by no means been all doom and gloom. Pent-up capital has been seeking an outlet, which has re­sulted in a wave of transaction activity, driven in no small part by the rise of special-purpose ac­quisition companies (SPACs). This has brought its own set of risks. A SPAC has just two years to deploy investor capital, which puts the onus on swift action. Rushing to market brings with it the risk of bad deals being negotiated and we should expect claims to be brought against directors and of­ficers as a consequence.

Company executives must also contend with the rising cyber threat, which has been exacerbat­ed by the shift to remote working. Additionally, environmental, so­cial and governance (ESG) issues are climbing up the agenda. With more personal accountability, changing attitudes and the rise of social media, directors and of­ficers are increasingly exposed to claims related to employment­related risks, ethics and culture.

Looking ahead, though, the big­gest threat over the coming years will be claims that result from cli­mate change and other environ­mental issues. These are already behind a number of D&O claims, a trend that is only going to accel­erate, driven by a combination of three groups of actors: activists, regulators and investors.

Activist efforts

The recent case brought by Greenpeace, five other environ­mental organisations and more than 17,000 individual claimants against Royal Dutch Shell in the Netherlands has brought this issue sharply into focus. Dutch judges ordered the oil and gas major to implement stringent carbon dioxide emissions cuts within the next few years.

On the same day, a tiny hedge fund – Engine No.1 – mobilised by a dissident shareholder group dealt a major blow to Exxon Mo­bil, unseating a number of board members in a bid to force the company’s leadership to reckon with the risk of failing to adjust its business strategy to match global efforts to combat climate change.

Given mounting public concern about the environment, activism is only going to increase and it will not just be oil and gas companies that are targeted. They may be first in the firing line as some of the world’s biggest polluters but firms across agriculture, industry, manufacturing, transportation, the list goes on … should expect to come under scrutiny as well.

Climate change is also being tak­en increasingly seriously by regu­lators. In 2019 the UK’s Prudential Regulation Authority applied new rules that require certain finan­cial services firms to nominate a senior manager responsible for identifying and managing finan­cial risks from climate change.

In the US, the Securities and Exchange Commission (SEC) is expected to require public com­panies to publish data on a whole range of new areas, including greenhouse gas emissions, work­force turnover and diversity, as its new chairman looks to enhance the SEC’s disclosure regime.
Gary Gensler, SEC chair, has already said it plans to introduce new climate-related and human capital rules as it steps up ESG disclosures and earlier this month closed a public consultation on a potential new rule, which is likely to be proposed in October.

Investor behaviour

But it is investors that probably hold the strongest hand when it comes to forcing companies to change their behaviour concern­ing climate change and, by exten­sion, raising the level of risk facing directors and officers should they fail to do so.

Last year, BlackRock – the world’s largest investor – an­nounced it was making climate change central to its strategy for 2021, putting environmental and social priorities at the forefront of its investment approach. With as­sets under management of more than $7trn, BlackRock has signifi­cant influence on most of the com­panies in the S&P 500.

Interestingly, BlackRock and fel­low investors Vanguard and State Street gave powerful support to Engine No.1 in its case against Exx­on’s leadership. These huge invest­ment companies rarely side with activists on such issues, so this marks something of a sea change.

Investor pressure is building elsewhere. Launched last year, the Net Zero Asset Managers initiative saw 30 of the world’s largest asset managers commit to supporting investing aligned with net zero emissions by 2050 or sooner. Just last week Amundi, Franklin Templeton, Sumitomo Mitsui Trust Asset Management and HSBC Asset Management an­nounced they were among the latest big investors joining the ini­tiative, bringing the total on board to 128, which means $43trn in assets are now committed to a net zero emissions target.

This is a now a one-way street. Companies across the board need to understand that failing to un­derstand and take seriously their exposures to climate change will have significant ramifications for them and, ultimately, their direc­tors and officers too.

The original article can be viewed here

The article below, by Tom Malcolm, Head of UK Broking at New Dawn Risk, was originally published in Insurance Day in June 2021.

Even though four years have passed, issues in cladding have still not been resolved since the Grenfell Tower tragedy. Individuals and families across the UK are stuck living in dangerously clad properties that are more vulnerable to fire and have plummeted in value, nearing the point of being unsellable unless expensive remediation work is carried out.

In February, the Housing Secretary announced that the government would finally be intervening and will pay to remove unsafe cladding for all leaseholders in high-rise buildings, providing reassurance and protecting them from costs. It will also introduce measures to boost the housing market and free up homeowners to once again buy and sell their properties. This is a very welcome development for affected homeowners but does little to address the issues still faced by architects, another key group impacted by Grenfell.

Architects are unable to practice without a professional indemnity insurance policy in place that protects them against a broad range of potential risks, including professional negligence that might result in property damage, personal injury or financial loss, which might stetch back over many years. The problem is the cost of this insurance has risen astronomically to the point where it poses an existential threat to some architects.

Underpriced cover

Why exactly has this happened? To find the answer you need to look back some time. Architects’ PI insurance had been under-priced for many years prior to the 2017 Grenfell Tower fire. The tragedy (and subsequent Hackitt Report) called into question the safety of accepted design and building practices for high-rise buildings, including the use of many types of common cladding, fire-safety management and the principles and responsibility for the sign-off of any building as being ‘safe’. What this brought to the fore was a number of systemic issues with the UK’s Building Regulations regime. 

Previously, any architect’s insurer could rely on the standards and efficacy of all architects’ work being guaranteed by adherence to building regulations, but the confidence of insurers in this as a protection against large-scale claims was undermined by the failings that Grenfell Tower uncovered, including a lack of any clarity over who was ultimately responsible for a building’s safety.

Since 2017, that uncertainty, combined with multiple claims post-Grenfell, has generated fear in the insurance market, with large concerns that the liability may be passed back to the architects and thus the insurers. We have seen many insurers withdrawing from the professional indemnity market altogether. This has caused demand to far outstrip supply, driving up prices to an unprecedented level.

In addition, insurers have also put strict restrictions on the limits they will cover for any one claim, as well as excluding any buildings with ACM cladding from their cover – a significant restriction for commercial architects.

Restrictions in cover also severely limit the types of work architects can carry out, (for example basements, swimming pools, anything fire related) meaning some bread-and-butter architecture project types are becoming close to uninsurable.

The virtually universal restriction on protection for fire safety and strategy in professional indemnity insurance policies issued to architects has led to mistrust of insurers, while insurers have been obliged to take defensive action in response to brokers seeking quickly to “block notify” all projects which may in the future face a challenge to their fire strategy. The ultimate outcome in some cases, and, depending on the breadth of the fire safety exclusion, has been that some firms have had to cease practising.

A way forward

A solution to all this lies with the government. Its announcement in February included a proposal to provide a state-backed indemnity scheme for qualified professionals unable to obtain professional indemnity insurance for the completion of EWS1 forms. Our view at New Dawn Risk is that this proposal should be expanded to include a provision to provide PI insurance covering architects and engineers who specified cladding materials that were within building regulations at the time.

This fund can either be delivered in the form of indemnities directed to the architect, or, we believe more practically, via a reinsurance scheme for insurers of architects, engineers, and other professionals to carve out exposures relating to the specification, inspection and installation of cladding materials that are now deemed to be unsafe. The scheme could be administered through a commercial third-party administrator and claims would be continued to be handled by the insurance industry. Participating insurers would contribute a levy of a percentage of the premium (maybe 5%) to obtain access to the reinsurance fund and would not be permitted to exclude cover for cladding or fire safety claims. We think this will allow the PII insurers to remove the exclusions that are crippling the industry – such as those involving tall buildings, specifications of cladding, etc. – and to moderate the premiums being charged to professionals that are exposed to such historical projects.

Ultimately, this issue has underlined the importance of all parties working together. Insurance brokers and underwriters, lawyers and professional bodies should continue to engage closely to lobby local and national government to broker an effective, long-term solution that supports architects and the wider construction industry.

The original article can be viewed here

What can we expect in 2021?

Silent cyber, also called non-affirmative cyber, is the unknown vulnerability in an insurer’s portfolio caused by any cyber risks that have not been explicitly excluded from policies where coverage was not intended to be provided.Whereas standalone cyber policies define clear boundaries for cyber cover, many traditional policies do not anticipate cyber risks; this does not preclude claimants filing claims, and courts agreeing with them, which could result in insurers paying certain cyber loss claims.

In July 2019, Lloyd’s mandated that all policies across all classes of business must explicitly clarify whether they provide cover for cyber risks by either excluding or affirmatively covering such exposures. They released a timetable for enforcing these measures, issuing four phases and pushing rollout every 6 months. The first phase, applied from 1 January 2020, addressed first party property damage policies. The second phase, from 1 July 2020, covered bankers blanket bond (BBB) and crime policies. The third phase, effective 1 January 2021, addressed professional indemnity (PI), D&O and other liability policies. The final phase will take effect on 1 July 2021, and includes lines such as marine XL, casualty treaty and employers liability/WCA.

With such a short timeline for insurers to become compliant, the industry has seen a trend amongst insurers of opting for umbrella-like cyber exclusions rather than offering affirmative cover when scrambling to meet these deadlines.  This pattern has been clearly seen throughout phases one and two, and even the newly-implemented phase three. It is unlikely that we will see much of a difference in phase four come July.

The lack of clarity provided by Lloyd’s when implementing overarching policy mandates has unintentionally created an echo effect, and the gaps in coverage once attributed to silent cyber are now still very evident, but just no longer “silent”. As carriers continue to exclude coverage, the only solution is for policyholders to pursue standalone cyber, which can cover gaps and may offer coverage clients had not previously considered. In 2021 it will be more important than ever to determine whether a separate cyber insurance policy is required and to meticulously ensure appropriate coverage is put in place.

James Bullock-Webster

The article below, by Tom Malcolm, Head of UK Broking at New Dawn Risk, was originally published in Insurance Day in January 2021.

The confidence of insurers in building regulations as a protection against large-scale claims was undermined by the failings the Grenfell Tower fire investigation uncovered.

While all profes­sional indemni­ty insurance has faced a hardening market during 2020, last year the sub-category of architect’s professional indemnity saw the culmination of four years of tumult, resulting in immense challenges for architects, their brokers and insurers.

The difficulties of renewing and maintaining adequate profession­al indemnity insurance for archi­tects has caused industry uproar and a swathe of negative publicity within that professional commu­nity. The Royal institution of Brit­ish Architects (Riba) has called on the Ministry of Justice to review the situation but, as yet, no solu­tion has been found.

The problem began with the 2017 Grenfell Tower fire. The trag­edy and subsequent Hackitt Re­port called into question the safety of accepted design and building practices for high-rise buildings, including the use of many types of common cladding, fire safety man­agement and the principles and re­sponsibility for the sign-off of any building as being “safe”. What this brought to the fore were a number of systemic issues with the UK’s building regulations regime.

Tearing up the rulebook

Previously, any architect’s insurer could rely on the standards and efficacy of all architects’ work be­ing guaranteed by adherence to building regulations, but the con­fidence of insurers in this as a pro­tection against large-scale claims was undermined by the failings the Grenfell Tower tragedy un­covered, including a lack of any clarity as to who was ultimately responsible for a building’s safety.

Since 2017, that uncertainty, coupled with the impact of many years of underpriced policies and combined with multiple claims post-Grenfell, has seen many insurers withdrawing from the professional indemnity market al­together. This has caused demand to far outstrip supply, especially following the Lloyd’s review of underperforming syndicates in 2018, which further increased in­surer exits from the segment as they looked to focus on more prof­itable lines of business.

In early 2020, there were gov­ernment moves afoot to rewrite the UK’s buildings regulations re­gime to help improve the situation, but Covid-19 has compounded the market’s issues by drawing gov­ernmental attention elsewhere, leaving unresolved issues and re­sulting in continued uncertainty.

Catastrophic pricing

Much of the impact of all of this has been price-related, with sub­sequent negative publicity for insurers attached. In May 2020, Architects’ Journal highlighted professional indemnity renew­al prices rises of up to 800% and campaigned for government sup­port on this issue for the industry.

By October Riba had issued a further statement, detailing its concerns about the significant re­strictions of cover that had begun to be common. During the autumn 2020 renewals, it was reported fire protection was excluded from almost all available architect’s pro­fessional indemnity policies.

Insurers have also put strict restrictions on “any one claim” limits; as well as excluding any buildings with aluminium com­posite material cladding from their cover – a significant restric­tion for commercial architects.

Restrictions in cover also limit the types of work architects can carry out (for example basements, swimming pools, anything fire­related), meaning some bread-­and-butter project types are becoming close to uninsurable.

The Architects Registration Board (ARB) head of profession­al standards, Simon Howard, re­cently spoke to Architects’ Journal about the difficulties architects were experiencing in acquiring adequate insurance at an afford­able price. He suggested these could prevent some firms operat­ing, saying: “No architect should purchase a professional indem­nity policy that fails to provide them with adequate cover for the work they do – and that includes fire safety cover. It is clear that if a firm is employed as a fire safety consultant and the policy excludes these activities, then the policy isn’t fit for purpose.”

The virtually universal restric­tion on protection for fire safety and strategy in professional in­demnity insurance policies issued to architects has led to mistrust of insurers, while insurers have been obliged to take defensive action in response to brokers seeking quickly to “block notify” all projects that may in the fu­ture face a challenge to their fire strategy. The ultimate outcome in some cases, depending on the breadth of the fire safety exclu­sion, has been some firms have had to cease practising.

No quick resolution

Looking ahead to 2021, it seems unlikely any of these problems will be quickly resolved. Archi­tects are heavily exposed to the vagaries of the economy. If GDP falls just 1 %, it .is normal to see a contraction in the architectur­al market of up to 12%, as large projects are taken off-stream by developers until the econom­ic environment improves. With Covid-19 looking likely to bring a much larger contraction in GDP than 1 %, insurers will, therefore, be extra cautious in the risks they are willing to underwrite this year. The insurer supply is not going to increase and, as a conse­quence, it is unlikely prices will stabilise in the near term, at least.

Perhaps the only solution is for all parties to work together. Riba is seriously concerned about the rising costs of professional indem­nity insurance and prevalence of fire safety exclusions, which pose significant risks to architects’ practices, clients and the public.

The institute has suggested all sides, convened by Riba, should continue to engage closely, in­cluding the insurance industry, construction lawyers and other professional bodies, and put pres­sure on the Ministry of Housing, Communities and Local Govern­ment and the ARB to broker a solution that supports architects.

We remain sceptical such an outcome is likely and, in the meantime, look ahead to navi­gating another challenging year in a sector that makes the rocket­fuelled directors’ and officers’ liability market seem stable and positively dull by comparison.

The original article can be viewed here

The article below, by Jonathan Franke, Tech, Media and Cyber Broker at New Dawn Risk, was originally published in Insurance Day in January 2021.

The market must be more proactive in terms of understanding and reviewing policy wordings, to accommodate the new exposures relating to 5G-enabled products and technologies…

The next 12 months will see the scaling up of the worldwide roll-out of 5G networks, with North America, Europe and East Asia leading the way.

The importance of 5G has grown since the onset of the pan­demic. With much of the world switching to remote working and with the prospect of home offices becoming the new norm, businesses and individuals are requiring faster, more reliable data speeds. Companies are also adapting to network management across multiple locations to con­tinue operating efficiently.

When it comes to data trans­mission and storage, the majority of the developed world will soon swing towards 5G, as we contin­ue to transition to a progressive­ly cloud-based economy, and that change brings with it a brand new cyber threat landscape – one that is yet to be clearly understood.

Before considering the insur­ance challenges 5G brings, it is important to understand exactly what 5G is. It builds on the evo­lution and development of its predecessors, 3G and 4G, allow­ing societies to smoothly transi­tion into the increased usage of smart devices and offering faster wireless browsing and streaming. According to Ofcom, 5G is “much faster than previous generations and also offers greater capacity, allowing thousands of devices in a small area to be connected at the same time”.

The 5G roll-out will continue to enhance the expansion of the in­ternet of things (IoT) in almost all industry sectors and many homes, as more and more smart devices connected to the internet become essential equipment. While this technology explosion is welcome, not all manufacturers of IoT devic­es have made cyber security a priority within their business plans.

Globally, there are now billions of interconnected devices, all communicating with each other; these devices have wide-ranging and differing security controls, leading to an unimaginable num­ber of potential vulnerabilities for criminals to exploit. A lack of shared security standards for IoT devices means network breaches and hacking have the potential to travel widely and loopholes oc­curring between two unmatched systems could easily be exploited by organised criminals.

All this means criminals have already recognised an opportu­nity to access seemingly secure networks almost undetected. Consumer and individual data could be compromised simply by having a domestic smart meter to measure electricity and gas usage. However, even more significantly for business insurers, 5G is being used in various industry sectors, from farming to manufacturing.

Investment in monitoring

Pre-5G networks have fewer “traf­fic points” and this means security monitoring and scanning is sim­pler, less time-intensive, and less expensive for businesses. Howev­er, 5G’s dynamic software-based systems have led to a huge increase in traffic points, and to take account of this, both business-to-business and business-to-consumer com­panies must prepare to invest in more sophisticated and increased levels of monitoring of their net­works, controls and technology.

Companies will need to place more and more reliance on IT experts to ensure adequate pro­tection is in place, in spite of a wid­ening IT skills gap. And they will have to do so at speed – planning for the increased risks associated with 5G should already be well developed. Those who have taken their eye off the ball, perhaps dis­tracted by adjusting their opera­tions to cope with Covid-19, run the risk of increased vulnerability.

The same applies to cyber and technology insurers. They have a responsibility to be 5G-ready too, in terms of making sure their cy­ber insurance offerings are up to speed and they are providing their clients with adequate protec­tion. It is also a responsibility for insurers to ensure their breach response providers are well in­formed about the developments and roll-out of 5G, as well as being able to respond even quicker to incident notifications and to start negotiations in the case of com­plex ransomware demands.

In 2021, we will see cyber insurers and buyers scrambling to be ready for the roll-out of 5G; word­ings are likely to change, and cov­erage could be challenged. Some better-informed and more proac­tive insureds may start to enquire into manuscript wording to cover the threats relating to 5G-enabled products and technology; it is up to insurers to understand these threats and to learn how to re­spond to these questions before clients come knocking.

This could make 2021 an even tougher year for this already challenged class.  A new and unexplored threat is likely to unsettle insurers and it also poses the questions of how new or changed risks should be rated on a premium basis.  Given an increasingly litigious and claims-active cyber sector, we would expect rates to increase and possibly capacity to constrict for new business in the year ahead and 2021 could be a difficult year for cyber insurers and buyers alike.

The original article can be viewed here

London, October 27th 2020: The London chapter of PLUS (the Professional Liability Underwriting Society)  met last week for a  webinar to talk through the evolution of the market, in a session entitled “London, You’re on Mute! The New Normal”

In a sign of both the importance of the topic, and the growing usage of virtual events, a record 160 members of PLUS in both London and North America gathered to debate the topic alongside panel members:

• Julian James, CEO, Sompo International
• James Masterton, CEO, Ardonagh Specialty
• Kim Noble, Senior Vice President, Thompson Flanagan
• Chris Warrior, Head of Commercial Management Liability UK, Berkshire Hathaway Specialty Insurance
• Brenna Westinghouse, Focus Group Leader and Underwriter, Professions PI, Beazley

The panel was moderated by Max Carter, CEO of New Dawn Risk.

Following the debate, the audience was asked for their views on how the market is currently working, and the results were positive.  Of 160 members polled:

• Only 14% of respondents wanted to return to work full-time in their office.
• 16% of respondents said they would want to work mainly at home permanently, while 70% would want to spend half their time in the office.
• 38% said that they were more productive since Covid-19, 44% said that their productivity had remained the same, and 18% said it had fallen

Max Carter, CEO of New Dawn Risk and Moderator of today’s PLUS webinar commented “This debate brought broad consensus that the way we work has permanently changed. For an industry that has not historically been known for thriving with technology, the market was able to adapt quickly and continue trading without missing a beat during 2020, and this has helped acceptance.”

“Relationships have been the hallmark of the success of the London Market in the past. If we are to have continued success in the future, we have to find ways not just of maintaining existing relationships in this new working environment, but of forging new ones.”

“The situation that we are currently facing is unprecedented; there is no established playbook or roadmap for navigating our way through it. That’s why events like this week’s PLUS debate are so important. We might not have all the answers, but reaching consensus on the questions we should be asking is an important step in the right direction.”

For more information: Victoria Sisson, Luther Pendragon, +44 (0)7941 294872

The article below, by Rachel Cohen, Senior Treaty Broker at New Dawn Risk, was originally published in the Middle East Insurance Review in September 2020.

Prior to the global pandemic and subsequent lockdown that occurred towards the end of March, the reinsurance sector had certainly seen some hardening of rates in the 1 January 2020 renewals, compared to what had been experienced in the past.

In the international casualty treaty sector, this hardening was more prevalent on loss affected programmes. Reinsureds were enjoying more and more increases in underlying rates, in particular on D&O and the professional lines of business, where increases were anything between 25% and 200%, even where accounts were claims-free. However, it could still be argued that rates were still not quite where they should be, mainly due to the excessive capacity in the market. As has always been the case, there was still a gap between the hardening of rates on the underlying business and the increase in the reinsurance pricing, although this gap was certainly becoming smaller.

Deteriorating results

In addition to this, the spotlight in the last six to 12 months before the pandemic had been shining brightly on the casualty lines of business, especially on the reinsurance side, which was never the case in the past. Lloyd’s was starting to voice its concerns over the long-term profitability of this sector.

In 2015 and 2016, the softening of terms and conditions in the international casualty market was paramount. There was an abundance of capacity and an absence of any severity or systemic losses, which meant that rates were at the bottom of the cycle or were approaching bottom. Fast forward to 2019/2020 and it became very clear that there was a plethora of under-reserving of claims in the past years and the prices charged by reinsurers were unsustainable, meaning the profitable results in many reinsurers’ casualty books were fast deteriorating.

Shifting sentiments

Although it is still very early days in terms of quantifying the impact of the pandemic on the underwriting results, it can certainly be said that reinsurers are more nervous than ever before. Their concerns over the challenges of insufficient reserving on casualty lines of business and inadequate pricing still remain, but now there is much more caution from reinsurers on writing any new business on their books, regardless if the casualty class in question is deemed to be potentially impacted by COVID-19 or not. This is because closer scrutiny by internal management is now even more prevalent across all reinsurance teams. There is not just scrutiny in terms of price, but much more close attention is now being given to wording coverages and more questions are being asked over any existing clauses in contracts that could be construed as ambiguous. It is still difficult to predict how the reinsurance rates will move as a result of the pandemic; in the next few months this will become much more apparent as reinsurers slowly begin to assess any potential pandemic losses.

Looking at the casualty treaty programmes for New Dawn Risk’s UAE clients that have been placed in the last four months, the main challenge is to make sure reinsurers are comfortable with the reinsureds’ assessment of COVID-19. Many questions have been posed to the client, for example are COVID-19 exclusions being put on the original policies? What exposures do they think they may have to COVID-19? Have there been any loss notifications so far? The main concern that reinsurers currently have is about picking up any additional exposures to COVID-19. Certainly, in the UAE, the majority of clients are imposing a COVID-19 specific exclusion or the communicable disease exclusion, both of which have been published by the Lloyd’s Market Association. There are also questions being raised as to whether insureds will see this as an opportunity to pursue claims where they would not necessarily have pursued previously, as a way of attempting to recoup money lost as a result of the pandemic.

Increasing rates

In the Middle East, there has been an increase in the number of casualty losses in the last couple of years, and it remains to be seen if these losses will increase post COVID-19. For the first time in a very long while, independent of the pandemic, there are underlying rate increases being seen in the UAE on bankers blanket bond and D&O business, which may be a sign of things to come if reinsurers start to feel the impact of the pandemic.

For the major part, it seems the reinsurance industry has been largely unaffected by the lockdown. One of the most integral features of the insurance and reinsurance market is the relationships between brokers, reinsurers and clients. However, the lockdown has proven that business can just as effectively be placed in the market with all parties working remotely. Brokers have probably been impacted by the lockdown more than underwriters as negotiations are much harder to carry out effectively over a video call rather than face-to-face at the Lloyd’s box or in a meeting room.

In addition, brokers who started 2020 very successfully with new business forecasts being met have now been faced with a big challenge in being able to meet their new business budgets for the next few months. Many businesses across the world will undoubtedly no longer be able to operate and others are no longer able to afford the big insurance capacity they previously purchased. In addition, premiums paid by clients to brokers and reinsurers are being delayed as businesses struggle with their cash flow.

Evolving loss picture

Business interruption cover given in property reinsurance covers is predicted to make up the majority of pandemic-related losses, while event cancellation and medical malpractice risks will also be impacted. There are also other policies, in particular cyber insurance, general liability or environmental policies, which may be available to meet third-party claims and therefore need to be considered.

Since the intention of D&O insurance is to protect a company’s board of directors and senior officers against claims, investigations and associated defence costs in relation to their actions in the course of managing
the company, this means that many COVID-19-related claims are expected to fall within the insuring clause of the policy. In the US, securities class actions have already been filed against corporations and their senior management in relation to COVID-19. As an example, it is alleged by investors that Norwegian Cruise Line Holdings misled customers with unproven or false statements about COVID-19, enticing them to buy cruises. In addition, Inovio Pharmaceuticals made false and misleading statements about a COVID-19 vaccination that it was producing. In both actions, it is alleged that the value of the company’s shares fell dramatically because of disclosures about the company’s true positions.

The knock-on effect of these pandemic-related claims is that all underwriters will be considering policy wordings carefully going forward and the need for specific exclusions for COVID-19-related (or more generally virus-related) losses. Certainly in the D&O space, both in the UAE and on a global scale, insurers and reinsurers are imposing more restrictions, but more concerning is that they are already drastically reducing capacity, looking to push rates even further, and squeezing commission rates. This may be the sign of things to come at the 1 January 2021 renewals, particularly in those classes of business mentioned above that are potentially facing the most serious impact from the virus. As everyone knows, reduced capacity is a catalyst for a hard market. The heightened scrutiny on renewals will continue and there will certainly be some reinsurers who will be reserving their capacity for renewals only.

Continuing uncertainty

The extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen. Reinsurers have started to de-risk their balance sheets by holding cash, which will have
a significant impact on investment returns. The two biggest Indian insurance companies, GIC Re and New India, have already been downgraded in the wake of the pandemic, and this possibly could mean a bleak future for other currently A-rated insurers and reinsurers across the world. These downgrades may certainly pave the way for opportunities for other prominent players in the market, as well as a chance for brokers to capitalise on their relationships with London and other leading international reinsurers.

The original article can be viewed here

Early September means Monte Carlo, and its physical absence has created a big hole in the 2020 reinsurance calendar, in spite of the excellent virtual initiatives that have been created.

The problem is that its absence will create a real communications gap.  The opportunity to informally have discussions with contacts who we might otherwise never see, is an invaluable oil in the wheels of major reinsurance and capacity deals across the market.  That face-to-face interaction not only helps bring together ideas, allows capacity providers and backers to set up opportunities for new business ventures and structure complex reinsurance programmes; but it also gives everyone an opportunity to get real transparency over barriers that might hinder the signing of deals that are underway.

Monte Carlo gives a window to brokers to extend negotiations and to get the most difficult deals done, and its absence could exacerbate some of the existing problems in appetite for new business among insurers and reinsurers in the London market at present.

Meanwhile, we have also now undoubtedly arrived at a hard market.  Within New Dawn Risk’s field, (the casualty and specialty market), this means the reinsurers are in control and will, to a large part, be able to dictate terms to brokers and cedants.  For brokers this means negotiations will become more difficult and commission will undoubtedly also be squeezed.  Cedants must expect that prices will be flat at best, terms will be tightened, capacity reduced and the number of exclusions increased.

Reinsurers won’t be pushed into deals that don’t tempt them.  In 2020 they will have the option to walk away.  All of this behaviour is reinforced, not just by hardening pricing, but also by the increased focus on deal scrutiny by internal management.  New business is harder for reinsurers to get across the line internally, and we see this lack of appetite as being particularly acute in the treaty market.  No one, it seems, is currently actively looking for new treaty business.  All in all, this reinsurance season could be challenging for all parties, and we will be working hard to mitigate this for our clients.

Max Carter and Rachel Cohen