Risk & Insurance Market Brief Q1 2016
Regional insurance buyers can expect to face friendly market conditions on their insurance renewals through the first half of 2016. This is due in part to statistically low catastrophe losses, the increased supply of capital flowing into the (re)insurance marketplace, and a competitive market.
Commercial property insurance rates will likely drop to low-to-mid single-digit percentage points. There is a possibility that they could decline by more than 10 percent, requiring insured organizations to demonstrate low risk exposures and good risk management practices.
The liability insurance rates will continue to be flat or see slight decreases, unless exceptional risk performance can be demonstrated. The exception to this will be motor third-party and motor comprehensive classes which is active with costly claims that are heightened by litigation and increasing repair costs.
Good underwriting experience and a lack of major weather and catastrophe events, both regionally and internationally, are trending well below the 10-, 20- and 25-year averages. These factors also effectively contribute to steady market conditions.
For an international perspective please tune into our Marsh webcast “Insurance Markets and Risk Trends in 2016”
Top 5 Risk Trends to Watch in 2016
- Increased Cyber Risk and Exposure: Cyber insurance is among the exceptions to the broad downward trend in the market. As cyber breaches increase, the demand for stand-alone cyber policies is dramatically rising. Cyber risk is presenting a significant challenge and many businesses don’t realize that they may be uninsured. Most policies issued locally, such as liability coverage, will typically exclude cyber events unless a client specifically requests the coverage. Other emerging crime risks such as financial loss from hacking, wire fraud, manipulation of Point-of-Sale (POS) systems are not covered under the standard theft and money policies. Businesses that maintain confidential client data such as pharmacies, hospitals and insurers are most vulnerable to a potential breach and theft of client data, extortion from the hackers, and liability claims due to insufficient logical security measures. Furthermore, these organizations may not be covered under their current insurance program. Insured companies should discuss options for specific cyber and commercial crime coverage with their brokers and insurance providers to assure financial protection against these risks.
- Complacency on Catastrophe Insurance: The lack of major weather-related events can lead to complacency regarding catastrophe exposure and overall risk management with some underwriters and insured individuals and companies. Over recent years, many people and companies have reduced their insured sums or cut certain classes of coverage such as business interruption to trim expenses. While this might save money upfront, this tactic exposes the individuals and businesses to significant financial vulnerability in the event of a loss. Without proper coverage for a major catastrophe, a business or person might not have the cash flow available to recover from losses, and may be unable to affordably sustain its operations or repair any damages to assets. For instance, the Napa Valley California Earthquake in 2014 took people by surprise. Prior to the event, insurance rates had fallen due to low demand and complacency with earthquake risk. At the time, only 12% of homeowners carried earthquake coverage. Then, the 6.0 magnitude earthquake hit, causing almost US$1 billion in damage.
Right now, businesses and individuals can take advantage of the historically affordable premium pricing, and ensure sums insured and limits are adequate in event of a disaster. Underinsuring and accepting risks such as business interruption should only be contemplated with an adequate risk management plan. This could include a self-insurance fund, line of credit to finance recovery, or tested business continuity plans.
- New Professional Indemnity Insurance RequirementsDriven by the new Corporate and Trust Service Providers Act 2015, there is a requirement for service providers such as lawyers and consultants to carry professional indemnity coverage. The guideline reads: “A service provider shall, in order to safeguard the interests of his clients, make adequate arrangements to address business disruption. Without prejudice to the generality of subsection (1), a service provider shall purchase and maintain a policy of insurance in an amount sufficient to cover the risk of losses in respect of the conduct of his business.” The Ministry of International Business has waived the obligation for service providers to carry this insurance this year, in order to give the industry a chance to implement these new requirements. However, services providers need to adhere to this new requirement for Professional Indemnity Insurance very soon.
- Concerns of Supply Chain and Contingent Risks: Contingent interruptions are not typically covered under the standard business interruption form. More so, incurring significant contingent business interruption and extra expenses due to supply chain disruptions doesn’t only come from physical damage.The International Air Transport Association (IATA) estimated that the worldwide airline industry lost €148 million (US$200 million, GB£130 million) a day during the disruption from volcano Eyjafjallajökull. After hurricane Sandy, about 20% of the losses incurred were due to interruption to revenue streams from businesses that actually had no physical damages, but saw business being diverted. The same could happen here in Barbados if a hurricane were to hit. Our clients’ revenue may be impeded for some time, not due to property damage, but slowdown in tourist traffic as the island rebuilds itself. Even more recently, the slowdown of processing of Customs at the Port demonstrates the financial impact of unforeseen disruptions, and these could also occur at an overseas supplier location or transshipment point.The solution involves understanding the interdependencies in the operational chain and developing continuity plans to address the exposures. Adding requisite insurance and supply chain coverage is also recommended as a solution to counteracting these contingent interruptions.The coverage rates are largely determined by the unique underwriting information from the client and their suppliers. Therefore, the best way to obtain optimum pricing for this risk is to work with a broker to identify key exposures. Clients that can provide good information, sound risk management practices and continuity planning will obtain the optimal premium pricing in 2016.
- Exposure of Directors and Officers Liability for Boards: New Legislation brings emerging risk for all Directors and Officers in Barbados. The duties of companies and its Board of Directors have increased under the new legislative environment including the Safety & Health at Work Act 2005, Occupational Pensions Benefits Act Cap. 350B and Employment Rights Legislation. Any negligence or non-compliance, even if unintentional, can result in legal action, fines or imprisonment for Directors. If the appropriate level of coverage is not in place, directors will have to personally fund the claim.Claims can arise from a variety of sources. Directors and Officers can be sued by shareholders, employees, the general public, third parties, customers, or government agencies. General liability policy (public liability policy) does not cover lawsuits against Directors and Officers, putting personal assets at risk. Even if the bylaws of the company provides for some indemnification, the company may not have the funding to cover the claim, and may be unable or unwilling to do so for other internal reasons given the circumstances.Directors & Officers (D&O) insurance serves to protect a Director and their personal assets. Directors & Officers (D&O) insurance also serves to protect the company and its bottom line, by reimbursing any legal defence costs.