Cyber Security’s Latest Buzz
Insurers, here’s a pop quiz. How secure are you that you fully understand all the risks you have accepted on behalf of your clients? That your book of business contains no surprises?
My guess is that you think you’re pretty secure, and my other guess is that you’re really not. One example should suffice, but before I explain, a trigger warning to decent folk: The subject is sex toys.
Right. Now that I have your attention … are you prepared to pay out when hostile forces take over your client’s love machines?
Far-fetched? Far from it. One vibrator on the market reports back to its manufacturer on the behavior of the toy’s owner. Worse, it can be commandeered by hackers.
Full disclosure: I know nothing of sex toys. In fact, I’m mortified just writing about them.
Insurers must cope with unknowable change while providing insureds with good vibrations.
Here are some facts, to steady the ship.
“Two years ago, someone had the good idea to put a Bluetooth connection inside a vibrator,” The Guardian newspaper reported. The vibrator can be linked to a smartphone app that controls it remotely. One party tells the vibrator what to do, and the other party, well, I dunno.
At a hacking conference, two independent hackers from New Zealand reported that the link between the vibrator and the app is not secure. A hacker could take control of the vibrator at a crucial moment and, well, I dunno.
Two million hackable vibrators have been sold. People could be unaware that they’re having virtual sex with total strangers, although in some circles that might be considered a good thing.
Sooner or later, though, hackees must surely come to the conclusion that advantage has been taken of them and demand recompense. Does your company cover vibrator hacking?
The app reports the temperature of the vibrator to its manufacturer every minute, and also reports changes in the intensity of the vibrations.
“What are the implications of who they’re going to give that data to?” asked one of the hackers.
In a statement, manufacturer Standard Innovation said the information was for “market research purposes, so that we can better understand what settings and levels of intensity are most enjoyed.” So that’s alright then.
If the readers of this magazine, the world’s smartest insurance people, were asked to list 100 utterly bizarre risks, not one of them would have written down “vibrator hacking.”
Insurers must cope with unknowable change while providing insureds with good vibrations. By the time the unimaginable becomes imaginable and then becomes hard fact, the risk is routinely covered and insurers are worrying about even more absurd risks that they might one day be asked to cover.
That’s why insurance is so fascinating to the observer — no one ever has any idea what’s coming next. &
‘Moderate Decline’ in Market Renewals
The sobering reality − for carriers anyway – of more than three years of declining renewal rates is tempered somewhat by the slowing rate of the declines.
The “Marsh Global Insurance Market Index” cited a downward slide in global insurance renewal rates for the 13th consecutive quarter, in the second quarter of 2016.
“Despite the continuing decline, the second quarter of 2016 marks the second quarter in a row that the rate of decline has moderated on average,” the report stated.
Global insurance rate decreases moderated on average for the second quarter to a 3.6 percent decrease, compared to a 3.8 percent decrease the previous quarter.
The U.S. was the only geography worldwide to experience an increased decline in renewal rates, particularly affected by weakening rates in D&O liability insurance for public companies.
U.S. cyber insurance renewal rate increases moderated in Q2 2016 to 6.9 percent on average, compared to last quarter’s average increase of 12 percent.
“We see the insurance market is soft and, quite frankly, there is no real end in sight,” said Connie Fredericks, senior vice president and director of marketing at Risk Strategies Company, a national insurance brokerage based in Boston, Ma.
“At this point, Brexit, global CAT events, and even for the most part, claims experience have not adversely affected rate and price.
“The market has significant excess capacity and the carriers are anxious to deploy that capital. Hence, we see a very competitive P&C pricing environment,” she said.
The Marsh report noted that global insured catastrophe losses increased in the first half of 2016 to $27 billion (compared to $19 billion in the first half of 2015), which could potentially cause some insurers to begin reconsidering rates if the trend continues.
The report also noted that the UK’s recent decision to leave the EU has yet to impact the market, but it will continue to be monitored.
Brokers say they are cautious about the outlook on pricing going forward.
Fredericks said global insurance rates should flow “flat to down” in 2017. “That is, unless global events or adverse claim activity begin to really impact insurer profitability.
“Competition within the marketplace continues to drive pricing down, whether it makes sense or not,” she said.
Other factors that come into play that could drive insurance rates downward, include continued high capacity, and a rise in catastrophic insurance balance sheet hits on major insurers, experts said.
Daniel A. Rabinowitz, an attorney and insurance market specialist for Kramer Levin in New York City, said, “You have excess capacity, caused in part by the proliferation of insurance-linked securities and other alternative risk transfer techniques.
“With so much capital in the system willing to be exposed to insurable risks, demand cannot outpace supply.”
Rabinowitz also pointed to the $27 billion in global catastrophe insurance industry losses as a major pricing factor going forward. “Can consumers and businesses now expect rate hikes in catastrophe insurance lines?” he asked.
In general, however, he does not expect any material rate hikes in the near future. “It’s still a very competitive, soft market due to ample capacity,” he said. “Even recent increases in CAT losses haven’t brought levels up to the major historical spikes, or enough to move rates.”
There’s a ‘big picture’ reason why global insurance rates are softening as well, said Joe Reifel, a partner with consulting firm A.T. Kearney and the leader of its America’s financial institutions practice.
“Two factors influence the global insurance rate landscape: First, the overall global economy is slowing. Beyond this, the underlying dynamics is on the capital markets side,” Reifel said.
“We’re seeing an increase of capital flows into the insurance industry, with greater use of instruments like CAT bonds, as institutions are trying to find higher returns in a very low interest rate environment.”
As capital flows into the market, insurer underwriting activity increases, and puts a downward pressure on pricing, he said.
“What typically offsets this is periodic catastrophes. But this significant capital inflow rapidly replenishes industry capital, and minimizes the hard market effect of any catastrophe on insurance rates.”
Swiss Re, however, recently came out with a bullish view on the global economy in 2017, which, it said supports insurance industry growth.
The entire crystal ball is a cloudy one on global insurance rates – and it won’t be clarified anytime soon with the upcoming U.S. presidential election, continued geopolitical strife with Brexit and the EU, terror threats across the board, and a mixed-bag global economy. &
Think You Don’t Need Environmental Insurance?
“I don’t work with hazardous materials.”
“My industry isn’t regulated by the EPA.”
“We have an environmental health and safety team, and a response plan in place.”
“We’ve never had an environmental loss.”
“I have coverage through my other general liability and property policies.”
These are the justifications clients most often give insurers for not procuring environmental insurance. For companies outside of sectors with obvious exposure — oil and gas, manufacturing, transportation — the risk of environmental damage may appear marginal and coverage unnecessary.
“Environmental insurance is not like every other insurance,” said Mary Ann Susavidge, Chief Underwriting Officer, Environmental, XL Catlin. “The exposure is unique for every operation and claims don’t happen often, so many businesses view coverage as a discretionary purchase. But the truth is that no one is immune to environmental liability risk.”
Every business needs to be aware of their environmental exposures. To do that, they need a partner with the experience to help them identify exposures and guide them through the remediation claims process after an incident. The environmental team at XL Catlin has been underwriting these risks for 30 years.
“Insureds might not experience this type of claim every day, but our environmental team does,” said Matt O’Malley, President, North America Environmental, XL Catlin. “We’ve seen what can happen if you’re not prepared.”
Susavidge and O’Malley debunked some of the common myths behind decisions to forego environmental coverage:
Myth: My business is not subject to environmental regulations.
Reality: Other regulators and business partners will require some degree of environmental protection.
Regulatory agencies like OSHA are more diligent than ever about indoor air quality and water systems testing after several outbreaks of Legionnaires disease.
“The regulators often set the trends in environmental claims,” Susavidge said. “In the real estate area it started with testing for radon, and now there’s more concern over mold and legionella.”
Multiple hotels have been forced to shut down after testing revealed legionella in their plumbing or cooling systems. In addition to remediation costs, business interruption losses can climb quickly.
For some industries, environmental insurance acts as a critical business enabler because investors require it. Many real estate developers, for example, are moving into urban areas where their clients want to live and work, but vacant lots are scarce. Those still available may be covering up an urban landfill or a brownfield.
“We’re able to provide expertise on those sites and the development risks so the contractor can get comfortable working on it. It’s about allowing our clients to stay relevant in their markets,” O’Malley said. “In this case, the developer is not an insured with a typical environmental exposure. But if there is a contaminant on the worksite, they could inadvertently disperse it. In a high-population urban area, the impact could be large.”
Banks also quite often require the coverage specifically because developers are turning to these locations with higher potential environmental risk.
“Though it’s not a legal requirement, insurance is a facilitator to the deal that developers really can’t operate without,” Susavidge said.
Myth: The small environmental exposure I have would be covered under other polices.
Reality: Environmental losses can result from exposure to off-site events and are excluded by many property and casualty policies.
Environmental risks on adjoining properties can lead to major third party losses. Vapor intrusion under the foundation of one property, for example, can unknowingly underlie the neighboring properties as well. The vapor intrusion can then seep into the surrounding properties, endangering employees and guests.
In other words, your neighbor’s environmental exposure may become your environmental exposure.
O’Malley described a claim in which a petroleum pipeline burst, affecting properties and natural resources 10 miles downstream even though the pipeline was shut off two minutes after the rupture. The energy company that owns the pipeline might have coverage, but what about the other impacted organizations? Many other property policies exclude environmental damage.
Sometimes the exposure is even more unexpected. In 2005, for example, a train carrying tons of chlorine gas crashed into a parked train set sitting in the yard of Avondale Mills — a South Carolina textile plant. The gas permanently damaged plant equipment and forced the operation to shut down.
“It’s not always obvious when you have an environmental exposure,” Susavidge said.
“When there is a big loss or a pattern of losses, the casualty market will typically move to exclude it,” said O’Malley. “And that’s where the environmental team looks for a solution. Environmental coverage has been developed to fill the gaps that other coverages won’t touch.”
Myth: We already have a thorough response plan if there is an incident.
Reality: Properly handling an environmental event requires experience and expertise.
In addition to coverage, risk managers need experience and expertise on their side when navigating environmental claims.
“For many of our clients, their first environmental claim is a very different experience because the claimant is not always a typical third party – it’s a government agency or some other organization that they lack experience with,” Susavidge said. “Our claims team is made up of attorneys that have specific domain experience litigating environmental claims issues.”
Beyond its legal staff, XL Catlin’s claims consulting team and risk engineers come with specialized expertise in environmental issues. 85 to 90 percent of the team members are former environmental engineers and scientists, civil engineers, chemists, and geologists.
“Handling environmental claims requires specialized expertise with contaminants and different types of pollution events,” O’Malley said. “That’s why our 30 years of experience makes a difference.”
Thirty years in the business also means 30 years of loss data.
“That informs us as a carrier how to provide the right types of services for the right clients,” Susavidge said. “It gives us insight into what our insureds are likely to experience and help us determine what support they need.”
Insureds also benefit from the relationships that XL Catlin has built in the industry over those 30 years. When the XL Catlin team is engaged following a covered pollution event, the XL Catlin claims team can deploy seasoned, experienced third party contractors that partner with the insured to address the spill and the potential reputational risk. And they receive guidance on communicating with regulatory bodies and following proper reporting procedures.
“The value of the policy goes beyond the words that are written,” O’Malley said. “It’s the service we provide to help clients get back on their feet, so they can focus on their business rather than the event itself.”
For more information on XL Catlin’s environmental coverage and services, visit http://xlcatlin.com/insurance/insurance-coverage/casualty-insurance.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of September 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.