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Symposium 2016

Today’s News, Tomorrow’s Claims: Challenges and Opportunities for Insurers

by ~ Jessica Park (Email) (Web Site)

The first panel of the 2013 MReBA Symposium featured informative and thought-provoking presentations on emerging risks in insurance and reinsurance by panelists J. Gary Love, Sallie Kraus, Robert Whitney, and Joseph Sano. The panelists addressed cutting edge topics including supply chain risk in the modern business world, first and third party cyber risk, and risks related to climate change, terrorism, and nanotechnology.

Supply Chain Risk

J. Gary Love kicked off the session with a discussion of the changes in exposures facing both insurers and policyholders resulting from the evolving landscape of supply chains in today’s business environment. Mr. Love noted that under a traditional business model, an insured typically controlled all facets of its supply chain, from raw material through manufacturing, assembly, and distribution. Now that businesses are more globalized and technology-oriented, channels of supply and distribution are becoming far more complex, often implicating multiple locations and suppliers. This results in a greater number of off-premises exposures, such as risks relating to service interruption, ingress and egress from facilities, logistics, computer systems, and acts of civil or military authority.

Mr. Love noted that traditional business interruption coverage, which is often limited to losses resulting from physical loss or damage at direct supplier or customer locations, may not be sufficient to address and provide coverage for these broader types of off-premises exposures. Traditional business interruption policy language may therefore require modification in order to adequately protect against modern supply chain risks and provide coverage for exposures arising from both direct and indirect suppliers, and for events like service interruption, acts of civil authority, and other such risks. It is even more important, however, for commercial policyholders to develop a good understanding of their different revenue streams, identify critical “pinch points,” and determine potential impacts that would result if such “pinch points” should suffer losses. Once this is understood, policyholders can more effectively determine what steps may be needed to mitigate those exposures.

Climate Change and Cyber Liability

Next, panelist Sallie Kraus addressed two “hot” topics in insurance and reinsurance—the potential impacts of climate change, and issues relating to cyber liability. On the climate-change front, Ms. Kraus noted that recent years have seen a rise in sea levels, ocean and air temperatures, and atmospheric carbon dioxide, which have been accompanied by an increase in catastrophic events. In 2011, for example, there were more $1 billion-plus disasters than ever before, and in 2012 there were $35 billion in insured property losses in the U.S. – which was $11 billion more than the average over the prior decade. Such losses often raise complex coverage questions and may implicate various types of coverage, including property coverage, crop insurance, general liability, D&O, and even E&O coverage. Regardless of whether this rise in catastrophic events and other losses is the result of climate change, insurers will need to implement measures to address these losses, such as monitoring and collecting data on emerging risks and claim trends, anticipating new sources of claims, and instituting revised underwriting guidelines.

Ms. Kraus also discussed a different set of issues presented by another emerging risk, cyber loss. Cyber loss may come in a variety of forms, from losses resulting from service outages to liability claims arising from data loss and security breaches. Though such events have been taking place more frequently over the last several years, cyber insurance is still an evolving market, and there is limited actuarial data about losses. There is currently wide variation in the types, terms, and conditions of cyber coverage currently available, and many businesses still do not have cyber coverage in place at all. Many insurance products focus on first-party aspects of cyber claims, such as remediation, notification, and crisis management, as liability is still difficult to estimate. As cyber coverage continues to develop, it will be important to obtain better data in order to more effectively evaluate the frequency, severity, and characteristics of data losses and facilitate effective underwriting of such risks.

Insurance and Reinsurance of Terrorist Acts

The third segment of the panel featured a thoughtful look by Rob Whitney at issues related to insurance coverage for terrorist acts. Mr. Whitney noted that whether an incident is considered a “terrorist act” within the meaning of a policy can have important coverage implications, such as the potential applicability of either express terrorism coverage provisions or terrorism exclusions. Terrorism-related provisions did not become prevalent in business policies until the months following the September 11, 2001 attacks, and the language of the provisions has evolved since that time. The language of terrorism exclusions, for example, was initially quite broad, but has been refined over the years since 2001. Today’s exclusions vary from policy to policy but are sometimes based on the definition of “terrorism” found in the federal Terrorism Risk Insurance Act (“TRIA”), which is triggered when an event causes at least $100 million in aggregate property and casualty insurance losses and is certified as an act of terrorism by the United States Secretary of State and Attorney General.

Under policies that utilize a TRIA definition, terrorism exclusions may not be implicated at all unless losses reach the $100 million threshold and there is an official certification that the event in question was a terrorist act. For example, the April 15, 2013 explosions at the Boston marathon have not been certified to be a “terrorist act” by the federal government, and reported property and casualty losses from the explosions appear to be far below the $100 million threshold. For this reason, policies with terrorism exclusions that track the TRIA definition of “terrorism” would likely preclude coverage for property and casualty losses arising from the Boston marathon event.

Nano Risk

For the final presentation, panelist Joe Sano addressed a concept new to many in the audience: risk related to the increasing use of nanotechnology in consumer products. “Nanotechnology” refers to the use of particles that have been engineered to a near-atomic size, resulting in properties different from those of the same particles in their ordinary form. Mr. Sano gave the example of “graphene,” which is a nano form of carbon that is extraordinarily strong and is a super-conductor. Use of engineered nanomaterials in everyday products is increasing rapidly – as of 2011, more than 1,300 consumer products contained nanomaterials, and over 200 new nano-containing products are being introduced each year.

Mr. Sano noted that, while little is known about the potential for nano-related adverse health or environmental effects, some early research does suggest that negative health and environmental impacts are possible. Though there are currently no reported decisions from cases alleging personal injury or environmental harm arising from defective nanomaterials, such suits are possible and could implicate a variety of coverages, including workers compensation, CGL, and E&O coverage. Insurers, accordingly, are beginning to recognize and address the potential risk associated with nanotechnology. In 2009, for example, one insurer launched a proprietary tool to help businesses identify and track nanotechnological risks associated with their operations, and in 2010 another insurer introduced a claims-made policy, tailored to small- to mid-sized manufacturers of nanoparticles or nanomaterials, which covers general and products liability for nanotechnology exposures. The Insurance Services Office (ISO) has also implemented classifications for nanotechnology – “Nanomaterial Distributors” and “Nanomaterial Manufacturing” – with a goal of collecting data specific to these classes to better evaluate the cost of nanotechnology risks.

Ms. Park is an associate at Sugarman, Rogers, Barshak & Cohen, P.C. She may be reached at park@srbc.com.

© 2013 Sugarman, Rogers, Barshak & Cohen, P.C. All rights reserved
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