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Emerging Pandemic Risks From Covid, Cyber, Civil Unrest, Mergers, and More... Part 2


Insurance Journal examined industries experiencing changes and challenges due to the COVID-19 pandemic, societal unrest and other market forces experienced in 2020. Here are the final five industry sectors that could see new and emerging risks in 2021 and beyond. (Read Part 1)

M&A Transaction Market

The mergers and acquisitions market saw record insurance premium in 2020, totaling around $2 billion worldwide, experts in this segment say. The growth of the insurance market aligns with the global growth in M&As as merger activity rebounded last year and a rise in litigation brought an upsurge in new policies, Reuters reported in December.

Many new insurers entered the market, with more than 30 in Europe alone, which pushed down premiums, though M&A specialists speculated that is likely temporary.

"In 2008, you could have probably sat the whole of the London M&A insurance community round a meeting room table," said Adrian Furlonge, partner at M&A insurance broker Helmsley Wynne Furlonge. "Now there are more than 300 people in that market."

M&A growth was particularly hot in the insurance industry, with 744 insurance agency mergers and acquisitions in 2020, up nearly 20% from 2019, a report from insurance consulting firm OPTIS partners found.

Private equity buyers dominated the activity and about half of all transactions involved sellers of property/casualty agencies, according to the report.

OPTIS predicted M&A activity will also be significant in the new year for several reasons.

"While it may not be quite as active as 2020, 2021 will probably be very active as a new wave of sellers looking to avoid an expected capital gains tax increase or simply to sell with a growth story emerge. Agency valuations and multiples for high-quality firms should continue to reach new upper limits as demand remains strong and the supply of quality firms is reduced," said Tim Cunningham, managing partner of OPTIS Partners.

Cyber

There has been a significant shift in profitability in the cyber insurance market as the changing risk landscape from data breaches and ransomware attacks brings new threats and increasing claims.

A report last summer from AM Best said growth in the market had slowed significantly compared with 2016-2017 when direct premiums written grew by more than 30% annually. While the admitted U.S. cyber insurance market grew by 11% year over year in 2019 to $2.25 billion, the rate of growth was lower than the previous year, marking the fourth straight year of the slowing trend. What grew instead were cyber insurance claims, doubling from 9,000 in 2017 to to 18,000 in 2019.

"Claims are growing exponentially, which will be an issue if prices cannot keep up with rising frequency," AM Best's report, Cyber Insurance: Profitability Less Certain as New Risks Emerge, stated.

Best advised carriers to focus on greater clarity in their insurance contracts "to set transparent expectations for themselves and their clients."

Carriers are also still battling claims from the large-scale 2016 NotPetya breach and the frequency of severity of ransomware attacks is escalating, with the average cost of ransom payments up 104% between the third and fourth quarters of 2019.

The massive cyber breach of several U.S. government agencies and dozens of private businesses in late 2020 by Russian hackers and the COVID-19 pandemic brought new challenges for companies who sent their workers home to work remotely and, in many cases, increased their exposures.

Still, carriers aren't giving up on this market and risk management will play a key role in minimizing any continuous and emerging threats.

"Cyber risk is definitely still insurable. To suggest otherwise is analogous to saying property risks are not insurable after a bad hurricane season," Meredith Schnur, Marsh's U.S. & Canada Cyber Brokerage leader told Carrier Management in January. "The cyber insurance market continues to evolve and expand to meet the changing nature of the risk."

Municipal Liability/Law Enforcement

Law enforcement and municipalities are among the many segments that have dealt with significant tumult this past year, but in their case, it's not completely related to the pandemic. Rather, the deaths of Black citizens by white police officers sparked racial justice movements across the country and shined a light on unjust police practices.

Police departments nationwide are under a microscope and compelled to address racial biases within their force.

Policies like police immunity when shootings occur and civil rights violations are being more heavily scrutinized and litigated, with multi-million dollar settlements in some cases.

The City of Minneapolis voted to abolish its police department after the May police killing of George Floyd. The incident sparked international Black Lives Matter protests and calls for police reform. Part of the recommended reforms in Minneapolis include requiring officers to carry their own professional liability insurance.

The city is also facing a lawsuit from Lloyd's family that alleges his rights were violated and that the city allowed a culture of excessive force, racism and impunity in its police force.

In Louisville, Ky., where Breonna Taylor was killed in July by police who entered her home with a "no-knock" warrant while she slept, the city paid out $12 million to Taylor's family and agreed to enact a series of reforms that seek to improve community relations and prevent future police shooting incidents. Louisville Mayor Greg Fischer called for a true transformation of the Louisville Metro Police Department in response to a report commissioned after Taylor's death that cited low morale and lack of diversity as perpetuating its problems.

The New York City Police Department enacted new disciplinary rules in January that would terminate officers found to use racial profiling or excessive deadly force.

The legal doctrine known as qualified immunity has worked as a liability shield against frivolous litigation in suits against police officers and the municipalities they work for by making it difficult for plaintiffs to prove excessive force. But after so many high-profile events, qualified immunity has come under scrutiny in the courts, with even some judges questioning its application in excessive force cases. If liability claims against police departments or municipalities succeed, insurers are often on the hook for paying at least part of the settlements, experts say.

The insurance industry is closely monitoring these events and how they will increase exposures in an already risky class. The insurance market has also looked at crafting new professional liability coverage for police officers as some jurisdictions seek to curb police misconduct by requiring officers to carry liability coverage for lawsuits alleging excessive force, a Reuters report stated last summer.

"I think we're in a new world," said Mark Turkalo at the insurance brokerage unit of Marsh & McLennan Companies Inc., about the trend. Turkalo said the firm is exploring whether it could develop the coverage.

Some insurers contacted by Reuters privately raised concerns about wading into a political quagmire. They also face a hurdle accessing police disciplinary records, which are confidential in many states, according to legal experts.

"A lot of our clients are asking" about the policies and carriers are working on coverage, said a senior executive at a U.S. insurance broker who was not authorized to speak publicly.

Transport/Delivery

The COVID-19 pandemic lockdown early last year brought the U.S. economy to a screeching halt as many businesses had to shutter in-person services or close their doors altogether. But one segment saw a boost that many are watching closely to see if the trend remains when the pandemic eventually ends.

Home delivery services through app-based platforms like DoorDash and Grubhub, as well as independent contractors delivering groceries or medical supplies, saw a spike in demand as people stayed home and had their necessities brought to them instead.

In response, several insurers, including Allstate, American Family, Farmers, The Hanover, Liberty Mutual, Main Street America, MetLife, and Nationwide, temporarily added or extended coverage for personal lines policyholders using their personal vehicles to make restaurant, grocery, pharmacy and other deliveries. Some states, such as Wisconsin, mandated insurers add the delivery coverage to personal and commercial policies while others, like Texas, Washington and Connecticut, asked insurers to consider doing so. Many insurers, however, voluntarily made the accommodation.

"Property/casualty insurers recognize that American businesses are facing unprecedented disruption," said David A. Sampson, president and CEO of the American Property Casualty Insurance Association (APCIA).

An analysis by the National Council on Compensation Insurance (NCCI) said the drivers that work with app-based entities are typically independent contractors and not covered by workers' compensation insurance, thus reducing the risk to insurers. NCCI predicted the surge in demand for delivery services was likely temporary, but in the warehousing and overall transportation sector, NCCI predicted an uptick in injury frequency was likely in 2020 because of the increased demand for delivery services.

The effect on the commercial auto space could be more significant. AM Best said in a July report that less road traffic during the COVID-19 pandemic may give commercial auto writers some breathing space from the high frequency and severity levels the segment has been experiencing for years, claims from meal or grocery delivery services could increase.

The ratings agency encouraged insurers to embrace technologies like telematics and enhance their rate, underwriting and claims-settling practices.

Personal Risk

The government lockdown from the COVID-19 pandemic last March forced companies to embrace allowing office employees to work from home as the country focused on reducing the risk of transmitting the virus. For the most part, this trend continues, and many expect to see more employers offering work-from-home flexibility when life returns to normal.

According to the International Labour Organization, about 7.9% of workers -- 260 million people -- were home-based before the pandemic, but this figure has more than doubled worldwide since last year.

Though many risks go down when employees are out of the office, there are still significant exposures to consider for home-based workers. The ILO said homeworkers are not given the same level of social protection as people working outside the home and are less likely to be part of a trade union or covered by a collective bargaining agreement. They can face greater health and safety risks, depending on what their job entails, and less access to job training opportunities.

ILO economist Janine Berg told the Thomson Reuters Foundation that advances in technology and the COVID-19 pandemic would lead to a permanent increase in people working from home by using the internet, email and videoconferencing.

"It's not necessarily a bad thing -- some people really like it. But it's about being aware of the potential risks," she said. "The pandemic has added urgency to these issues."

Still, NCCI predicted that the overall frequency of worker injuries will decline.

Safety concerns extend beyond injuries for those workers at home, however. As employees moved out of their secure office networks and into home-based offices, there was a flood of cyber-scams and hacking attempts related to the COVID-19 virus, a March Bloomberg story reported.

Nearly one in four respondents (22%) out of more than 1,200 business leaders surveyed in 2020 Travelers' Cyber Risk Index said their firm was the victim of a cyber event -- the highest percentage since the annual survey began in 2014. Travelers' Index found that cyber threats are a top concern for large and medium-sized businesses, particularly as the ongoing COVID-19 pandemic forced many businesses to transition quickly to a remote working environment. The percentage of survey participants whose companies have at least 40% of their workforce being remote has more than doubled during the pandemic, from 26% to 59%.

"Employees working remotely are often on routers that are less secure than corporate networks, so when workers return to the office, they're potentially exposing their companies to greater risk if a corporate device has been compromised," said Tim Francis, vice president of Cyber Risk Management at Travelers Insurance.

Cybersecurity experts have emphasized the importance of ensuring employees have proper network security to protect their businesses from cyber vulnerabilities.