The pace of change in the global insurance market has not slowed down in the last 12 months, nor are there any indications of it doing so over the course of the coming year.
As traditional risks look different and emerging risks demand traditional policies to be considered under a new lens, the London Market seeks to reassert its ability to adapt and manage the constant evolution of global risk.
The wealth of experience and expertise within the London Market means that it is well placed to adapt to the changing insurance environment but it, too, needs to continually assess, evolve, strengthen and improve. As has been evidenced in recent years, along with industry led measures, an understanding of potential market disrupters is vital. Anticipating changing risk perceptions remains key to retaining the unique benefits of the London Market.
Global political influences continue to be headline news, but business, environmental and societal drivers are rising in their influence and, as such, are key to any forecast.
As 2020 promises to continue down an evolutionary path, we offer our predictions on some of the London Market’s priority areas:
Aviation | Casualty coverage | Construction | Cyber | Energy | Financial lines | Marine | Product liability and life sciences | Professions | Political risks | Property damage
The potential impact of Brexit continued to dominate industry headlines and conversations throughout 2019 and, as we enter 2020, this shows no sign of abating. The narrative has, however, shifted and questions over the length of and the content of the negotiations that will take place during the 2020 transition period are now front and centre of all strategic business planning.
We are, however, likely to see a change of political gear in 2020 and witness a transformation to a government that creates momentum on other critically important issues. Might the re-emergence of a domestic agenda mean a return to ‘business-as-usual’ in 2020? Indeed, with 30 pieces of legislation announced in the Queens’ Speech in December 2019 – the largest number since 2006 – this government clearly intends to demonstrate that it is ready to move domestic policy forward.
Alongside the political rhetoric – both in the UK and the US - another voice has emerged. This is the voice of a global social conscience, led by arguably the world’s most influential teenager. Whether you share her perspective or not, the ‘Greta Thunberg effect’ is undeniable in the rise of global conversation around climate risk and the need to act.
Climate risk is, of course, not new. The Governor of the Bank of England, Mark Carney, spoke in 2015 of the need to respond to the threat of climate related risks and this resulted in government and regulators implementing policies to address these issues.
2019 saw the public and business community response gather wider momentum and, as this report demonstrates, the impacts and related losses touch almost every sector within the London Market.
Other themes that we expect to develop during 2020 range from technological innovation – such as the development of autonomous vehicles and smart medical devices - to a changing workforce and the need to assess how to effectively attract, develop and retain global talent, to heightened geo-political risk and the consequential impacts on business, communities and infrastructure.
In the midst of this political, societal and technological transformation, the London Market continues to develop its strategy to ensure that it maintains its unique positon by staying current, relevant and competitive. The IUA’s business plan for 2020 highlighted climate change and cybersecurity as priority areas. Lloyd’s has published an ambitious vision in the form of the Future of Lloyd’s and Blueprint One, which describes Lloyd’s strategy to build the most advanced insurance marketplace in the world. These initiatives must be developed through 2020 to ensure the London Market continues to lead the way in the global insurance market.
Against this background, we consider the key priorities for the London Market in 2020.
With Brexit now seemingly a certainty, airlines will require assurances from the government and specifically the Department of Transport that all necessary plans are in place to make the transition as smooth as possible for the industry. Continued access for UK airlines to ‘open skies’ in the EU is the most pressing concern, with this right being currently dependent entirely on the UK’s membership of the EU. Without a quick solution the prospect of some UK airlines moving their operations to the EU remains a possibility. Brexit will also impact non-EU airlines operating flights from the UK into the EU by means of a codeshare with a UK carrier. These traffic rights on EU open skies are by virtue of the UK’s EU membership so again a solution will be required to enable such codeshare operations to continue. Aviation in the UK is overwhelmingly regulated by EU legislation so whilst the key concern will be to work on a mechanism to enable the airlines traffic rights throughout the EU, the industry will also be keen to know what impact Brexit will have on issues such as air passenger rights, consumer regulation and environmental issues, all of which are currently regulated by the EU.
The updated UK drone regulations came into force on 30 November 2019 with a new strict regime of compulsory registration and competency requirements for all drones weighing between 250g and 20kg in the UK. In line with the new rules anybody operating a drone/unmanned aircraft who has not obtained their Operator ID and/or Flyer ID from the CAA will be breaking the law and subject to a current maximum fine of £2,000. It remains to be seen whether the competency requirements of the online education package will be stringent enough, but it is hoped that the registration requirements, with the added threat of a fine, will provide regulators with more power to promote safe drone operation in the saturated UK skies.
The threat of cyber attacks remains a real concern for airlines, in particular following the ICO’s Notice of Intent to fine British Airways £183 million for breaches of the General Data Protection Regulation after user traffic to the British Airways website was diverted to a fraudulent website, compromising the personal data of approximately 500,000 customers.
Contact: Simon Balls
As climate science has developed in recent years to enable the relationship between emissions and climactic events to be quantified, a new wave of climate change litigation is developing, principally in the US but also in other jurisdictions. In the US, there have already been multiple climate change liability suits brought against energy companies by counties, major cities and one state (so far). General liability insurers will be watching these developments with particular interest because the US claims to date, which seek multi-billion dollar compensation for the rising costs of climate change (including the cost of state actors making improvements to flood defences, employing additional firefighters to tackle wildfires and upgrading municipal drainage), have been presented as product liability claims on the basis that petroleum is a “defective product”. This has already spawned the argument that the claims attract cover under the defendant energy companies’ general liability insurance. The number of climate change liability claims is only likely to increase over the coming decade, as climate science improves and extreme weather events become more frequent, resulting in potentially massive liabilities for the insurance sector and posing new challenges for the insurability of climate-related events.
Although addiction to prescribed medication is a problem across the developed world, it has not (so far) translated into group litigation in the UK, where the nature of the predominantly publicly funded health service does not provide the same climate for diversion of medication for non-therapeutic purposes. Time will tell whether there will be UK group litigation and this remains an area to watch.
The #MeToo movement and the disgrace of Harvey Weinstein has brought sexual harassment in the workplace claims to the fore. Similar type claims will inevitably increase over the next few years, although the ramifications for general liability insurers are, we suggest, likely to be limited with the employers’ practices liability insurers being most at risk. The recent talk of a settlement of the Weinstein civil claims by insurers at less than US$50 million gives some hope to the market that these types of claims may not in fact be the next Armageddon scenario (at least for general liability insurers). That said, the trend towards an increase in volume of claims as a result of the collective sense that any such complaints will now be taken seriously means this is still an area to watch.
Last year we identified the risk of unstable financial markets producing further construction insolvencies, which has unfortunately come to fruition. This is likely to continue and there remain concerns about potential labour and supply chain issues post-Brexit. However, it is hoped that the March Budget will bring a much needed boost for the construction industry, with promised infrastructure spending and a new construction strategy. There is likely to be change to public sector procurement, to take account of the new government’s focus on better use of digital technology and innovation.
Another trend that we expect to develop is ‘Modern Methods of Construction’, which largely relates to off-site construction methods. This could be anything from off-site manufacture of certain components, to the factory manufacture of fully fit-out housing pods. This growing area (we are already seeing numerous claims with issues around pods constructed off-site) throws up numerous issues regarding construction insurance, and will undoubtedly lead to judicial comment to assist with appropriate allocation of responsibilities within contractual frameworks that involve such construction methods.
Towards the end of last year, the Court of Appeal delivered its decision in Lloyd v Google, which potentially paved the way for US-style group litigation for data breach claims. The decision also indicated that damages may be awarded simply for “loss of control” of personal data, even if there is no material loss or distress. In light of this judgment, combined with evidence that claimant’s solicitors are actively targeting victims of data breaches, we predict that data subject claims will feature prominently in 2020. We are expecting not only an increase in the volume of these claims, but that the value of these claims will also be slightly elevated.
To make things even more interesting, we understand that the Court of Appeal decision is in the process of being appealed, so there is a chance that the landscape could undergo further significant change before the end of the year.
We are also expecting to see how the effects of the first post-GDPR regulatory decisions by the Information Commission’s Office (ICO) will crystallise. In mid-2019, the ICO gave notice of its intention to issue multi-million pound fines to both British Airways and Marriott in the wake of their high-profile data breaches. We are now nearly two years on from the implementation of GDPR and these large fines may signal that the regulator intends to adopt a more stringent approach to any future breaches of the legislation.
Volatility in the Middle East remains a concern for the energy sector. Recent events will have a significant impact on oil prices and the appetite for construction projects. From an insurance perspective, operators will need to look closely at their insurance policies to ensure they are adequately covered in respect of claims arising from civil unrest.
These have been caused by a number of socio-economic triggers including: WhatsApp tax (Lebanon); petrol price hike and more recently the shooting down of the Ukrainian plane (Iran); lack of public services and corruption (Iraq); fuel prices/cost of living/pensions (France); subway prices (Chile); extradition treaty (Hong Kong).
Whilst these factors may have been the immediate triggers, the underlying causes are much more complex and widespread.
Environmental pressures and protests (for example Extinction Rebellion) pose a particular threat to the energy sector. We have seen the impact of this on the fracking industry in the UK.
Banks, pension funds and other investors are looking much more closely at the “carbon footprint” of the companies in which they invest. For example, it will become increasingly difficult for coal mining companies to attract investment, however much “cleaner” their new projects are. This investor reluctance is likely to spread to the oil and gas sector.
Cyber remains a threat, not just in relation to data but also in relation to potential physical loss and damage, as energy projects continue to be an attractive target.
Contact: Patrick Foss
The striking number of high-profile corporate collapses and restructures in recent years looks set to continue into 2020, with Beales the latest casualty. This trend has been impacted by a range of issues giving rise to an economic slowdown, including exchange rate fluctuations, changes in consumer/market behaviour and uncertainties surrounding Brexit.
It is a fair bet that further liquidations will lead to an increase in claims against D&Os as insolvency practitioners look to maximise recoveries for creditors alongside claims against auditors. Such actions involve not only the Financial Reporting Council examining the conduct of Chief Financial Officers at the helm when companies fail, but also the Insolvency Service looking at broad duties on all board members to oversee and ensure corporate financial health. Depending on the significance of the insolvency, then investigations may also be commenced by the Insolvency Service and Business, Energy and Industrial Strategy Committee.
Regulatory bodies seek to hold corporate entities and individuals liable when things go wrong and the trend for finding individual culpability as the means to changing corporate behaviour can be expected to continue. Increasing powers are available to regulators/bodies such as the Financial Conduct Authority and Serious Fraud Office, and D&Os are faced with a plethora of potential sanctions, including criminal offences, such as bribery/failure to prevent bribery and tax evasion.
The Competition and Markets Authority continues to consider the effect of mergers and anti-competitive conduct to ensure fair deals for consumers and has not been afraid to intervene and take enforcement action. In a competition context, we await the Supreme Court decision in Merricks v MasterCard this year, which will decide whether under Competition Appeal Tribunal rules an application for a Collective Proceedings Order (CPO) should be made certifying the claim as suitable to proceed as a class action. This would be the first time in the UK that an opt-out procedure would be used in collective action.
Climate change is increasingly seen as a threat to financial stability and the health of a company’s balance sheet. Consumers and shareholders are increasingly demanding ‘green’ action/financial products, and prudent D&Os will need to assess and manage a company’s activities from an environmental perspective or face the prospect of legal action. Shareholder activism has been a powerful tool to effect change within “carbon majors” (i.e. oil and gas companies) in terms of emissions reduction and activists are now focussing on financial institutions who provide financial services to such companies.
Financial institutions are being pressured to lend only to environmentally responsible entities. Shareholder primacy, i.e. a board’s obligation to deliver value for shareholders, which forms the basis of UK corporate law is now coming under threat, with the board also needing to consider other stakeholders i.e. suppliers, employees, customers and wider community interests. Shareholders, for example fund managers, are themselves coming under pressure from their clients to ensure that the companies they invest in will deliver long-term returns, which requires them, in turn, to look at climate change issues.
The spotlight on diversity and equality is having an impact on many businesses, regardless of size, nature or geographical location. The #MeToo movement is expected to lead to an increased number of claims arising out of sexual misconduct allegations, whether against the perpetrator or those responsible for their appointment or management, which could impact underwriters of both D&O and employment practices liability insurance. As well as gender, focus is on diversity generally within all organisations: i.e. boards have to demonstrate that systems are in place and that procedures are complied with to deliver equality in terms of race, religion, disability and socio-economic status. Failure to engage with these issues may lead to liability.
Advancing technology continues to present both opportunities and challenges and cyber risks remain a concern for all businesses, no matter what their size. Data breaches have become more common and the responsibility for complying with the GDPR falls on directors. Directors need to be ever vigilant about cyber protection and ensure training and monitoring of risks is adequate, as well as having processes in place to mitigate cyber risk in the event of an attack.
Today’s directors have significant responsibilities not only in preserving company value and ensuring success in the future but also in responding diligently to political and environmental tensions, emerging technologies, changing regulation, and the need to promote diversity. The D&O landscape will continue to be challenging.
Geopolitical risks are possibly more acute now than at any time. The significant escalation in tensions between the US and Iran make it likely that Iran will again seek to disrupt tanker traffic in the Persian Gulf, especially at its pinch-point at the Straits of Hormuz. Any perceived over-zealousness in US foreign policy could see attacks on their and their allies’ interests both physically and in cyberspace, potentially impacting supply chains and generating losses into the marine market. There remains a considerable risk of delays in cargo movements and of associated claims as a result of the trade war with China, the increase in populist uprisings and political instability, and of course, Brexit, depending on how that plays out.
Autonomy has long been part of the shipping world, but the back end of the last decade is when it was widely appreciated that fully autonomous shipping could be on the horizon. Developments in artificial intelligence and, perhaps more importantly, significantly better connectivity at sea will allow these ideas to now develop at pace. Increased automation, it is hoped, will result in more efficient and cleaner shipping which should also result in costs’ savings and better safety.
However, as with any significant change to an industry will come with many challenges. Legal frameworks, that have existed alongside traditional shipping for centuries, will be tested.
We enter the new decade with a new sulphur cap, effective from 1 January 2020. The cap is a welcome change for an industry which some have said has lagged behind its carbon footprint obligations, and requires vessels to reduce sulphur emissions from 3.5% m/m to 0.5% m/m. Vessels will now either have to stem the more expensive VLSFO or ensure that the vessels are fitted with scrubbers which will allow the use of dirtier fuels which can be cleaned before emissions into the atmosphere. These additional expenses are going to result in disputes between owners and charterers as they seek to allocate responsibility for those costs. The influx of this type of fuel into the market, whilst greener, does come with the risk that engines will experience problems with new blends which could give rise to breakdowns. That in turn will cause delays, cargo claims and general average/salvage situations – all of which increase insurers’ exposure.
Product liability and life sciences
A Brexit deal has now been agreed in principle and, on the basis that the European Parliament consents, the UK will formally leave the EU on 31 January with a transition period in place until 31 December 2020. Despite some uncertainty remaining, there is optimism.
According to the Association of British Pharmaceutical Industry, “The Prime Minister’s Brexit deal includes an important commitment to exploring close cooperation on medicine regulation. Achieving this will be important in prioritising patients and public health as well as the future of the UK life sciences sector.”
Even in the event of a no-deal Brexit, the government has shown a firm commitment to the long-term success of the life sciences sector, guaranteeing funding for all successful competitive UK bids to Horizon 2020 submitted before the UK’s departure from the EU as well pledging to increase R&D investment of £2.3 billion in 2021/22. The government’s recent Medicines and Medical Devices Bill builds upon this continuing commitment to ensure the “growth of UK life sciences sector to ensure we remain at the forefront of the global life sciences industry”.
Medical devices using a wireless connection such as pacemakers, defibrillators and monitors are all at risk of exploitation by hackers. Product liability claims may be made where a software vulnerability and/or cybersecurity risks results in property damage and/or personal injury and is not as safe “as persons are generally entitled to expect”.
The risks of these products may fall on multiple potential defendants, from the delivery and supply chain (designer, manufacturer, shipper, seller) as well as the treating physician and/or hospital or GP practice, which recommends the smart medical device to the patient. However, smart medical device manufacturers should be mindful that insurance policies may not provide coverage for every consequence of a cyber attack. They could be left facing substantial costs in defending related product liability claims, and also irreversible reputational damage.
Another area to watch is the development of autonomous vehicles. Currently, if there is a motor accident, liability will lie with the driver of the vehicle if it can be proven that the driver was negligent. However, where an accident occurs as a result of a fully autonomous vehicle and with no human error involved, it follows that liability will shift from driver to manufacturer, who will have responsibility for programming the software and producing the vehicle. However, for as long as humans actually sit in autonomous vehicles, causation will remain a live issue – the driver or the vehicle? This shift in liability could affect many companies in the manufacturing supply chain including software developers, software providers and telecoms service providers. Each company and their insurer will need to be aware of their potential exposure to liability claims.
Brexit has dominated headlines since the referendum in 2016, and 2020 will see the UK exit the European Union. We are already seeing this having an impact on supply chains in the construction industry with companies taking action to ensure they will continue to have the products they can rely on at the correct price.
Equally, this may also see UK based companies performing roles and providing services/materials for which they have previously little or no involvement, further increasing their professional liability. In the solicitors’ sphere and related to this, the negotiation of Brexit clauses and the impact of such is a new risk we expect to see.
Climate change is something that all companies and their board must address. We have seen a shift towards green energy and companies being held accountable for what they are doing to help the environment. As part of this, new technology (with future unknowns) and changes to legislation is leading to claims against those professionals in the tech sphere. That includes the designers responsible for the way in which renewable energy is provided, with regard to biomass waste energy, windfarms, hydro and wave power. Given the rise in environmental concerns and corporates being held accountable for their corporate social responsibility, we also expect to see increasing claims related to reputational damage.
2020 has begun as 2019 ended, with devastating wildfires dominating news headlines. The risk of UK wildfires exists and is growing – this is not a risk that applies only to hot, dry regions. As well as the risk to life and health comes the inevitable risk of damage to property and infrastructure, and the question as to whether landowners and the construction industry are doing all they can to reduce the impact of wildfires on the community by, for example, the use of fire resistant materials and careful management of flammable material. However, the difficulty we are seeing in this area - and which will inevitably be a trend for 2020 - is the change to building regulations and construction legislation and the standard to which construction professionals must adhere.
For many years solicitors have faced familiar liability risks arising from alleged negligence in the conduct of their client’s affairs. Insurers and brokers have over 20 years of trends data since the demise of the Solicitors Indemnity Fund to allow them to calibrate their rating models to predict the frequency and severity of such claims. 2019 has foreshadowed a new risk: regulatory breaches of the new Solicitors Codes of Conduct (the STARS). Many insurers offer regulatory costs cover in their policies and can expect that to be called upon more frequently as investigations, prosecutions and SDT hearings are likely to become more prevalent, and to deal with aspects of solicitors conduct both in and outside the office as apparent from cases such as Ryan Beckwith which received much publicity in late 2019.
The fabrication or exaggeration of claims (claims farming) is regrettably something that appears to be on the arise and not just in the personal injury industry. We have now moved away from PPI and holiday sickness, but the latest trends appear to be cavity wall insulation and loan commissions.
Whilst the role of climate change in the recent Australian bushfires is a subject of debate, that, together with the efforts of high-profile activists, has served to bring the issue to the front and centre of public and industry consciousness. Indeed, even Ferrari are aiming to have hybrid vehicles make up 60% of their line-up by 2022, and are working towards the introduction of a fully electric model. This decreasing dependency on oil will likely hit economies in sub-Saharan Africa, such as Nigeria and Sudan, that derive a significant proportion of their income from the productions and sale of the commodity and its refined products, and political turbulence very often goes hand in hand with economic turbulence. The issue of climate change may well therefore act indirectly as a driver of further political instability in the region.
The current US administration’s actions in the Middle East appear to be designed to propagate uncertainty and it is not clear whether Washington has a broader strategic objective or whether actions such as the killing of the head of the Islamic Revolutionary Guard Corps, Qasem Soleimani, are solely an opportunistic means of keeping regional actors guessing. Whilst Iran’s admission that it mistakenly shot down a Ukrainian passenger jet, killing 176 people, has led to demonstrations in Tehran calling for the overthrow of the regime, there is only a slim chance that the protests will be able to gain the momentum necessary to bring down the Iranian leadership, which has shown itself willing to use force to quell dissident voices. Assuming that the Iranian regime remains in place, Iran’s supreme leader, Ayatollah Ali Khamenei, has called for an end to “the corrupting presence of America in the region”. Whilst there is no appetite in either Washington or Tehran for an all-out war, we might therefore expect to see Iran using regional proxies to attack assets associated with the US or its allies.
The general downturn in global trade may well have implications for insurers whose business touches upon trade in soft commodities. A drop in demand for such commodities, with a consequent decrease in income for the producers, could well mean that producers are left without sufficient working capital to be able to fulfil their contractual obligations, leading to claims against contract frustration policies. Furthermore, political instability arising as an indirect consequence of decreasing global trade volumes could also leave producers in politically volatile regions unable to meet their obligations to buyers.
As the deadly bush fires rage throughout Australia causing untold devastation, loss of life and destruction of wildlife to an area five times the size of Wales, as we foreshadowed last year, it now seems generally accepted that climate change is behind the increase in the frequency and intensity of weather-related disasters, bringing significant losses and challenges for insurers. Whilst it is too soon to estimate the likely losses (property damage, business interruption, denial of access etc.) from the current bush fires, this is the third major natural disasters to afflict Australia in 12 months after the hailstorm in Sydney in 2018 (£685 million) and floods in the northern town of Townsville (£630 million). Europe was also affected by extreme weather events: ‘biblical’ storms caused major damage in France, Greece and Italy with Venice suffering its biggest flood in 50 years. In England, Yorkshire and the Humber, East Midlands, West Midlands and parts of the South East England were affected by severe flooding.
It is estimated that hurricanes, wildfires and floods cost the world US$150 billion in 2019 and future losses for business and the economy are only expected to increase.
Understandably the insurance industry is calling for concerted action to mitigate the impact of climate change as there are concerns as losses mount that insurance premiums may have to increase beyond the reach of those needing the protection most particularly in areas of climatic extremes. Research by Climate Analytics found that no more new coal projects can be built if the goals of the Paris Agreement are to be met, yet there are currently 1,600 coal extraction, production and generation projects planned globally.
Therefore, at present, the problem is likely to get worse as countries put their own economies first although it is worth noting that a large proportion of the insurance industry have taken the principled stance of not offering construction cover for the insurance of new coal fired power stations.
Closer to home the fear that Brexit could bring civil unrest has subsided - although London did face nine days of back-to-back (generally peaceful) protests from the Extinction Rebellion. Elsewhere civil and more violent and destructive disturbance was on the rise with few corners of the world spared significant protests in 2019. Whilst Hong Kong dominated the headlines Russia, Serbia, Ukraine, Spain, France, Hong Kong, Lebanon, Iraq and Albania have all seen major demonstrations. South America too has been badly affected with our overseas offices seeing increased claims from Brazil, Peru, Ecuador, Chile, Colombia and Venezuela, all of whom have experienced popular unrest.
In Chile government officials estimate arson, looting and property destruction in five weeks caused US$3 billion in property damage. Whilst the protests all have different triggers, a common theme is socio-economic issues (stagnating wages, social inequality etc.) affecting risk.
Looking ahead, climate change and socio-economic factors are likely to continue to dominate the agenda. As wealth disparity shows no sign of abating, increased talk of worldwide slow down/recession, the rise of more extreme political figures, increased trade wars not helped by the unpredictable approach of White House (at least until the election in November) means 2020 is likely to be another volatile year. Also with the Iran crisis unfolding at the time of writing there is a fear that western assets, particularly power plants and refineries might be targeted.
The above are not easy issues, and in the coming years as artificial intelligence becomes more main stream with it will bring the challenge of job losses (particularly unskilled) and in turn the risk of more social unrest. Tackling these issues will be challenging for governments and industry as they extend beyond their geographical reach, but unless they are addressed insurers may end up footing the bill for the damage which ensues.