Insurance Rate Declines Moderate as Cyber Shines

Global insurance rates declined for the 15th consecutive quarter, remaining competitive for most of 2016, according to the Marsh Global Insurance Market Index, Q4, 2016, which tracks industry data.

Insurance rate decreases moderated in the fourth consecutive quarter as global property rates continue to drop at a greater rate than other lines, mainly due to overcapacity and a lack of insured losses, according to the report.

“The last quarter of 2016 marked the 15th consecutive quarter in which average rates declined, largely due to a market with an oversupply of capacity from traditional and alternative sources and a lack of significant catastrophe losses,” Dean Klisura, global industry specialties and placement leader at Marsh, said in a statement.

After peaking at a 5% global quarterly rate of decline during the fourth quarter of 2015, that rate moderated throughout 2016. “The fourth quarter of 2016 marked an entire year (four consecutive quarters) in which the average rate of decline for global insurance rates moderated—a first since Marsh initiated the index in 2012,” says the report.

Worldwide, rates declined by 3.1% while the U.K. and Continental Europe saw the greatest regional drops at 4.8% and 4.2% respectively. Latin America saw the smallest regional drop at just 0.5% as the U.S., Asia and Pacific regions hovered midway with declines of 3.0%, 2.7% and 2.2%, respectively.

By business line, global casualty lines had the slowest rate decline at 1.9%, followed by Marsh’s Global FinPro (financial and professional) at 3.0% and then global property with the largest decline of 4.2%. U.S. rate declines reflected global figures with U.S. casualty rates declining in the fourth quarter at a rate of 2.1%, U.S. FinPro at 2.5% and U.S. property at 4.8%.

By contrast, the Marsh report tracked rising U.S. cyber liability rates, up 1.4% for Q4 2016, which was actually the smallest increase since rates started rising in Q3 2014 at a rate of 4.8% before peaking at 20.0% in Q2 2015, then beginning a steady decline toward the latest quarter. Despite steadily rising cyber liability rates, the report notes that “the number of clients purchasing cyber insurance increased 25% from 2015 to 2016 across all industries, with the greatest overall take-up in healthcare, communications, media and technology.”

Insurance markets in the U.K. and Continental Europe remain competitive, the report said, as Latin American casualty and financial and professional liability rates increased. Casualty rate increases were largely due to rising auto insurance prices, particularly in Colombia and Mexico, where Marsh says it has a large market share.

Some rates in the Pacific region notched increases, with casualty rates up 0.4% and financial and professional liability rates up 1.7%. Asia’s commercial insurance market remains competitive, according to the report.

While the report appeared to paint an overall picture of industry-wide softness, there was some suggestion of a turn in the tide. “Early indications that capacity may be moderating and that combined ratios may be increasing could be harbingers of looming rate increases as carriers seek to boost profitability and keep combined ratios below 100%,” Marsh says in its report.

In addition to looking back with its rates report, Marsh also takes a look forward in its “U.S. Financial and Professional Market in 2017: Our Top 10 List.” The company states that decreases in the directors and officers insurance market, continue “nine straight quarters of rate decreases.”

The Top 10 list goes on to say that cyber insurance will evolve as “risk professionals will need to address evolving cyber risks across multiple platforms,” and adds that financial and technology industries are converging at an increasing pace. “Financial companies will increasingly see exposures that were historically the domain of the technology industry,” it says.

In its “Casualty Insurance Outlook: Good News for Buyers in 2017,” Marsh says 2017 is “generally a buyer’s market for casualty insurance buyers, who typically are seeing strong competition and ample capacity for most casualty lines.”

Chipotle Provides Yet More Reminders of D&O and Food Safety Risks

chipotle food borne illness outbreaks

If the average food safety crisis or product recall forces companies to weather a storm, Chipotle has spent the past year trying to weather a category 4 hurricane. Now months into their recovery effort, it seems they are still seeing significant storm surges.
Last week, a group of Chipotle shareholders filed a federal lawsuit accusing executives of “failing to establish quality-control and emergency-response measures to prevent and then stop food-borne illnesses that sickened customers across the country and proved costly to the company,” the Denver Post reported. The suit accuses executives, the board of directors, and managers of unjust enrichment and seeks compensation from Chipotle’s co-CEOs, while also asking for corporate-governance reforms and changes to internal procedures to comply with laws and protect shareholders.

Sales remain significantly impacted by the series of six foodborne illness outbreaks last year. The company reported in July that same-store sales fell another 23.6% in Q2, marking the third straight quarter of declines for performance even lower than analysts had predicted. The company’s stock remains drastically impacted, currently trading at about $394 compared to a high of $749 before the outbreaks came to light a year ago.

In addition to the most recent shareholder lawsuit, the bad news for directors and officers specifically has also been further compounded recently. Shareholder lawsuits were filed earlier this year alleging the company had misled investors about its food safety measures, made “materially false and misleading statements,” and did not disclose that its “quality controls were not in compliance with applicable consumer and workplace safety regulations.” In June, a group of shareholders sued a number of top executives for allegedly violating their fiduciary responsibilities and engaging in insider trading. Relying on insider knowledge about insufficient food safety protocols, the suit alleges that the executives sold hundreds of thousands of shares in the first half of 2015 before the food poisoning scandal was made public.

Check out previous coverage of the Chipotle crisis in the Risk Management March cover story “Dia de la Crisis: The Chipotle Outbreaks Highlight Supply Chain Risks.”

July P&C Composite Rate Steady, Transportation Increases

The property and casualty composite rate for July was the same as June’s rate, which was minus 1%, MarketScout reported today, adding that insurers are working to stop the downward trend.

“While insurers continue to grant minor rating concessions, many are pushing for an end to any further rate reductions,” Richard Kerr, CEO of MarketScout said in a statement. In the transportation sector, however, pricing is increasing “on all but the very best accounts. The poor loss experience in transportation has prompted underwriters to demand rate increases and restrict underwriting appetite.” Insureds that are unable to convinceBarometer underwriters they can control losses are left with few options “and ultimately end up paying a much higher rate/premium which impacts their profit margins,” he said.

Kerr continued that insurance buyers in the transportation industry are complaining about the lack of cooperation they are seeing from insurers as they try to manage their risk portfolio. “Business owners and corporate CEOs are concerned their insurance premiums will be larger than what was budgeted therefore negatively impacting net profits,” he said.

He advised these insureds to “allocate capital towards implementing loss control and companywide safety programs. That is how they will get cooperation from their insurers.”

A comparison of June 2016 to July 2016 rates by coverage classification reveals that workers compensation and property coverages were the most aggressively priced at minus 2%. Business interruption, business owners policies (BOP), fiduciary and directors & officers all moderated by moving rates from minus 1% to flat, or no increase. Professional liability rates moved from down 2% to down 1%. Rates for all other coverages were unchanged.
Rates-coverage class

There were no rate adjustments by account size from June to July.
Account size

By industry classification, rates for public entities moved up from minus 1% in June to flat or no increase in July. Transportation accounts were assessed at the largest rate increases from up 1% in June to up 3% in July, according to MarketScout.
Industry class

Risk Landscape: Coverage Trends to Watch

Being aware of your company’s new and changing risks is critical for sound risk management. As the year progresses, we have identified growing risks facing
companies, and their directors and officers, that are likely to impact policyholders. These risks include cybersecurity, Telephone Consumer Protection Act (TCPA) lawsuits, drones, wage and hour lawsuits and food recalls. The risks and issues to watch out for are expanded below:

Cybersecurity

Cyberattacks against businesses doubled in 2015 and are expected to continue to increase as attackers become even more sophisticated. Watch out for:

Phishing scams and social engineering fraud. In social engineering scams, hackers utilize phishing, purporting to be legitimate employees or third parties try to trick businesses into wiring funds or allow access to their systems. Although many businesses have crime insurance that covers “computer systems fraud,” ambiguous provisions or liability limits may restrict coverage. SomCompliancee courts have held that fraud coverage applies only when intrusions are unauthorized, but not when an unwitting employee falls prey to an online scam.

Data breaches. Companies should also be conscious about their coverage for data breaches, which increasingly present significant exposures. Insurers often contest whether data breaches constitute “publication” of private information, and, if so, whether an insurer’s duty to defend applies. This is particularly important as the storage of consumer data is a lynchpin of many businesses’ operations and marketing.
Businesses need to ensure that their commercial insurance policies adequately cover their business risks and consider purchasing dedicated cyber policies.

Coverage for TCPA claims

Certain efforts to engage with consumers may come at a steep cost. Under the Telephone Consumer Protection Act (TCPA), businesses that send unsolicited faxes, voice calls or text messages to consumers may be held liable for at least $500 per violation.

General liability coverage of TCPA claims. In recent years, commercial general liability (CGL) insurers have increasingly added broad exclusions to their policies for TCPA claims. Moreover, courts are split on whether “right to privacy” coverage in CGL policies cover these claims. Some courts uphold coverage only for losses from incidents that divulge confidential information (secrecy-related claims), whereas others uphold coverage for unsolicited communications, even if they do not republish confidential information.
While such coverage may be restricted under CGL policies, policyholders may have coverage under their directors’ and officers’ (D&O) insurance.

LA Lakers test case for D&O coverage. In 2016, the Ninth Circuit will likely address this issue in an appeal by the Los Angeles Lakers. The franchise’s marketing campaign included sending unsolicited text messages to fans. When sued under the TCPA, the franchise sought coverage for its defense costs under its D&O policy. In April 2015, a California federal court rejected coverage, finding that the policy’s “invasion of privacy” exclusion precluded coverage.
As businesses seek to engage consumers directly through various media, they should consider whether their insurance protects against TCPA claims.

UAVs and Insurance in 2016

Unmanned aerial vehicles (UAVs), or drones, promise to revolutionize not just commerce but insurance as well. The United States Federal Aviation Administration (FAA) estimates that, by 2023, annual global spending on UAVs will total $11.5 billion, and by 2020, about 30,000 commercial and civil drones will dot the skies.

Drone property loss and liability. The rise of drones raises several risks. The most obvious of these risks are loss of property and third-party liability. Use of drones for package or cargo delivery raises the risk of damage to the UAV itself—or its payload, which is usually the bigger loss. As shown by recent news reports and the first lawsuit, Boggs v. Merideth (W.D. Ky.), operators face liability for costs of defense and settlements or judgments payable to third-party claimants when UAVs go astray. With drones’ ability to film and collect data, other risks include privacy-related claims and data breach and hacking.

New coverage provisions. In June 2015, the Insurance Services Office, Inc. (ISO), approved new coverage provisions addressing commercial use of drones. The new ISO provisions modify standard CGL and umbrella/excess liability policy forms and merit close consideration by policyholders.
Because these new provisions are untested, policyholders should review them carefully against their entire insurance program and consult with insurance advisors to ensure that new provisions or policies provide the protection needed. Companies using UAVs should consider the aviation insurance market and also assess the need for cyber insurance coverage for privacy and data-breach exposures.

Wage-and-Hour Lawsuits

Cases alleging violations of the Fair Labor Standards Act (FLSA) have shot up in recent years. In 2015, almost 9,000 FLSA cases were filed in federal court, up more than 10% from 2014, and 30% from 2011. State courts have also experienced high volumes of wage-and-hour cases. California and New York recently enacted laws that allow directors, officers, and in New York, “top 10 shareholders” to be held personally liable for wage-and-hour violations.
Traditionally, companies have looked to their employment practices liability (EPL) and D&O insurance to protect against the defense and liability costs in wage-and-hour lawsuits. However, EPL insurance policies today regularly exclude coverage for such claims. Unlike EPL policies, D&O policies do not routinely exclude such coverage, but are including such exclusions with increasing frequency. As a result, policyholders must review D&O policies carefully to ensure that they protect against the threats posed by such claims.
Brokers and insurers have been developing new insurance products that specifically address these increasing wage-and-hour exposures. Policyholders, particularly those with significant operations in California and New York, should consider these newly emerging wage-and-hour specialty policies to ensure that they are adequately protected.

Food Contamination and Recall Coverage

The number of food product recalls for alleged contamination, undisclosed ingredients and other mislabeling issues also has risen dramatically. Although CGL and business property insurance policies provide some protection against liability for food contamination and recalls, savvy food companies should also consider specialized recall and contamination coverage.
These specialized policies may cover the reasonable costs that a policyholder incurs, for example, to examine its products for contamination, announce and institute a product recall, safely destroy contaminated products, and reimburse distributors and retailers for down-stream recall costs. Such policies often include crisis management coverage to help the policyholder mitigate negative media reports.

Varying types of special coverage. Because recall and contamination policies are not standardized, individual insurers offer differing policy terms and levels of coverage. Companies contemplating the addition of such coverage, or pursuing coverage under an existing policy, should closely examine the policy to understand the scope and limitations of coverage.

Items to watch. When purchasing such coverage, food companies need to identify their primary risks and negotiate the broadest possible coverage. In addition, because such policies often include very strict notice requirements, policyholders should give notice as soon as a recall arises to avoid coverage denial on late notice grounds.

Christina Buschmann, Linda Powell and Adrian Torres, Perkins Coie Insurance Recovery attorneys, also contributed to this article.