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Global Risk

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Extraordinary socio-economic, technological, geo-political and environmental developments are just some of the factors shaping the global risks landscape.  Our international network pulls together the emerging issues from around the world.


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Global Risk predictions

UK Spaceflight : on your bike, Baikonur?

The Space Industry Act 2018 promises to usher in a new era in British spaceflight. This will include the expansion of commercial space, sub-orbital and associated activities, bringing additional opportunities for the global space insurance market.  That ambition can only be realised if there are UK spaceports with ground or air launch capabilities.  The UK’s ambition may not be to displace Baikonur or French Guiana.  However, the dream is that future annals of commercial spaceflight activity in its broadest sense, will speak of North Uist, Unst, the A’ Mhòine peninsular, Prestwick, Campbeltown, Snowdonia and Newquay.  The earmarked sites are not without geographical challenge and operations will have to counter seasonal UK weather conditions.  Spaceflight operations above the UK skies also has the potential for air traffic control headaches and there are associated environmental concerns (e.g. fuel spillages on sites and noise pollution on launch). In 2021 work will also continue apace to flesh out the regulations for UK spaceflight, to put meat on the bones of the Space Insurance Act 2018. This will include regulations governing licencing, spaceflight accident investigation and, importantly, insurance that will herald a new dawn for UK spaceflight capabilities.

A Chinese perspective: Golden Week foreshadows a bright return

In 2021, Chinese aviation is set to roar back into business. In the ‘Golden Week’ holidays from 1 to 8 October 2020, around 13.26m people travelled by air in China, equivalent to 91.1% of passenger numbers in the same period in 2019. This indicates strong recovery, certainly by China’s domestic aviation industry, to the relief of Chinese airlines (who struggled to pay staff salaries just months ago) and the aviation industry in general. There are shoots of recovery also on the international front, with interesting lessons to be learned: China replaced restrictions on carriers with ‘reward and circuit breaker’ rules in June. These mandated one week’s suspension of a route if five passengers tested positive in a single flight, while rewarding an additional flight per week to carriers with a clean slate in terms of COVID-19 positive passengers over any three week period. Pre-flight testing and compulsory 14-day quarantine (for international flights), plus health QR-code monitoring and travel tracking (for domestic flights) seem to have worked well for China. All augurs well for a bright return to form for Chinese aviation. This may also shine a golden light on potential recovery (and risk exposure) for the aviation industry globally.


Health and social care claims: a perfect storm

We predict an increase in abuse, neglect and other casualty claims as a result of the COVID-19 pandemic and lockdowns which have affected the protection of the most vulnerable. In the first wave, schools were closed to all but the children of key workers. Opportunities were lost for schools to spot signs that children were suffering from physical abuse, neglect, domestic violence and emotional harm. There was a drop in referrals to social services and other agencies. Social services will struggle to meet the increased demand for services following children returning to school and this will lead to an increase in ‘failure to remove’ claims against local authorities.  In addition to the widely anticipated claims from families of care home residents and staff working in care homes in relation to the lack of effective PPE and exposure to COVID-19, we expect adult social care in residential settings and in the community to also be impacted. An inability to access community facilities, reduced home and family visits, unavailability of staff and the unfamiliarity of greater numbers of agency staff increases the risk of volatility and incidents of violence and aggression directed towards staff and peers. Difficult balancing decisions are being made by managerial staff in often isolated circumstances and uncertainty and a general lack of control over working conditions increase the chances of workplace stress.

An Australian perspective: pandemic-related mould and legionella risks in empty buildings pose new threats

Due to COVID-19, many commercial buildings have been vacated for a large part of 2020. Building maintenance in many parts of the world has also been limited, either due to regulations limiting access or financial constraints. Dormant heating, ventilation, air conditioning and plumbing systems that have not been maintained create a heightened risk of legionella outbreaks, including for offices, restaurants, bars, spas, gyms, health clubs, hotels and holiday rentals. Similarly, mould growth can greatly impact indoor air quality. These environmental risks are likely to lead to a complex interplay between criminal and civil investigations. Insurers will need clarity around how to deal with them.


Supply chain ethics must be core focus of board directors

The recent Boohoo scandal has highlighted the need for companies to monitor and investigate closely the pay and working conditions, not only of their own employees, but also of those in their global supply chains.  Companies will need to ensure full compliance with the provisions of the Modern Slavery Act by the company itself and also by all its sub-contractors.  Supply-chain ethics is of growing importance both for regulatory authorities and investors; companies committed to the fair treatment of their workers, providing them with appropriate working environments and adhering to ethical codes, are likely to rise above the rest.

2021 will see an increase in securities class action lawsuits

There was a downward trend in securities class actions against non-US listed entities in 2020 but this is likely just a blip so be prepared for a resurgence in 2021. From January to June 2020, securities class action filings were down 66% compared to the same period in 2019. It is not clear why but one possibility is COVID-19 slowing the plaintiffs’ bar along with the rest of the global economy. We expect to see a significant number of class action cases filed in 2021, with a renewed focus on entities based in Latin America. The pandemic will inevitably lead to economic uncertainty and boardroom pressures, and we expect this to be particularly prevalent in the natural resources industry.  The NYSE for 2020 lists over 20 Latin American entities in the natural resources sector. We predict an upwards trend in securities class action lawsuits arising out of the following key issues: environmental and governance issues which are increasingly important to stakeholders; climate change litigation; and delays to construction and energy projects due to economic uncertainty and the fall in crude oil prices.


Recognition will be key post Brexit

The UK’s departure from the European Union will leave a host of uncertainties hanging over the insurance industry. Many of these will surround the mutual recognition of regulations, especially those governing solvency. The UK Government confirmed in November that it intends to recognise the prudential regimes of the European Economic Area states as being ‘equivalent’ for the limited purposes of the UK rules that will apply after the transition period. However, hopes that this will be reciprocated by the European Commission may be disappointed in the short term. The position is complicated by HM Treasury’s call in October 2020 for evidence to review some aspects of the prudential regime for UK insurers, in particular the matching adjustment and solvency capital requirements. The fall-out from Brexit is far from over.

Contingency planning will be a certainty in 2021

Businesses across the globe are shaking up their contingency planning in the wake of the COVID-19 pandemic. As a consequence, many will take a very different approach to insurance as they seek to reconfigure how they assess, mitigate and transfer risk. This will ask hard questions of the role of insurance as firms face up to the threats from critical uncertainties that have the potential to be highly disruptive to their businesses. It will accelerate discussions about the boundaries between private provision and state-backed provision.

A Scottish perspective: will we see the break up of the UK when Scotland is still using England as a blueprint for reforms?

The pandemic, originally an existential threat bringing the four nations together, has now become a wedge threatening the unity of the Kingdom. Coupled with Westminster’s handling of Brexit (which the majority of Scots voted against), this has increased the likelihood of a second independence referendum. Were this to happen and, based on recent polls, return a vote in favour of independence, this would provide a shock to the Scottish judicial system, already malfunctioning badly due to COVID-19.  Years of pan-UK laws could overnight be disapplied causing chaos. Ironically, the Scottish Government has recently looked to England for a blueprint for procedural change. The introduction of QOCS and allowance of class actions, referral and success fees means defenders are braced for a flood of historic abuse claims, COVID-19 related class actions and speculative and fraudulent cases being advanced.


Opioids litigation will raise novel coverage issues

The opioids litigation brought by state authorities against US pharmaceutical manufacturers, distributors and other healthcare providers rumbles on.  Across the US, claims have been brought by public authorities which have allegedly incurred significant losses due to the fall-out from the opioids addiction crisis, including increased healthcare and law enforcement expenditure. They allege cynical marketing practices against the pharmaceutical industry.  Currently, a US$22bn settlement is being discussed by four distributors including McKesson.  Meanwhile Purdue and Mallinckrodt have filed for bankruptcy protection while seeking to resolve opioid lawsuits.  At the end of October 2020, Purdue agreed a settlement with the Department of Justice. The claims present novel coverage issues for general liability insurers, including the trigger of coverage by reference to ‘personal injury’ (given the direct victims of opioid abuse are not the claimants) and whether there are fortuity/’expected/intended’ or non-disclosure arguments.

A US perspective: bad faith allegations will appear earlier and across all areas

Liability claims in the US will become increasingly high value and complex for insurers.  Although insurers are used to dealing with allegations of bad faith, we predict these allegations will be made early on in litigation as plaintiff firms look to maximise the available pot for their clients.  This tactic is already prevalent in motor cases, but is increasingly being used across all product lines and in high-exposure matters. Even in cases that would not traditionally fall within an insuring agreement, there is a trend for plaintiffs to include single line allegations in complaints with the objective of triggering a duty to defend for insurers.  The argument here is that if there is a duty to defend then there is a duty to settle, even uncovered claims, and that the failure to accept the early demand opens the limits.  In high value, complex cases, particularly those involving multiple insureds or cross-jurisdictional issues, insurers are well-advised to take coverage advice early on.

A US perspective: social inflation will spread to other jurisdictions

Social inflation will continue to concern insurers writing US liability business and looks set to spread to other jurisdictions.  Until now, the rising cost of claims, due to social, political, legal and economic developments, has been considered largely as a US phenomenon.  It is not new, but has been attributed the cause of year on year increases in jury awards against insureds and their insurers, as well as more frequent ‘nuclear verdicts’. There are signs similar factors may contribute to an increase in the cost of claims in other common law jurisdictions, such as Canada, Australia and the UK, and also civil law jurisdictions, for example the Netherlands and Mexico. In the US, the increase in court awards has been driven by increasingly available litigation funding and the desire of juries to lay the blame for injury and loss at the door of large corporations, especially when they are backed by the perceived ‘deep pockets’ of insurers.  Although the US jury system is not replicated in any other country for civil cases, insurers need to consider the widening access to litigation funding outside the US, the growing willingness of courts to hold large corporations to account for activities worldwide, and the risk of increased awards in tort claims, such as for ‘moral damages’ in civil jurisdictions.

An Australian perspective: liability risks will continue with glyphosate, opioids and talcum powder – with PFAS and silicosis emerging

Globally, there are increased claims involving glyphosate, opioids and talcum powder, including a notable decision in the US against Johnson & Johnson and a A$10bn settlement of tens of thousands of claims in Australia regarding Roundup. There is also a growing concern around perfluoroalkyl substances (PFAS), with litigation being pursued against the Australian Government regarding PFAS in waterways and land around military bases. Silicosis claims are also emerging from Australian workers exposed to crystalline silica dust associated with the artificial stone industry.

A German perspective: upcoming developments in German supply chain legislation

The German legislator wants to oblige large companies to observe duties within ‘risk fields of human rights’ along the supply chain. The nearer companies are located to each other in the supply chain, and – as a consequence – the more influence they may exercise on each other, the more they will be exposed to potential liability. That means undertaking due diligence proportionate to the risk (the likelihood and potential severity of human rights impacts) in a company’s own global operations and those of its suppliers and customers. Companies would be required to establish human rights grievance mechanisms and to use commercial leverage to discourage human rights contraventions.The law will come into force in 2021 despite COVID-19, even though German companies in particular might lose access to important sales markets due to this regulation.


Beirut explosion provides cargo insurers with stark reminder of accumulation risk

Following the recent Beirut port explosion, cargo insurers will increasingly look to harness technology to develop more sophisticated risk modelling by monitoring cargo in real time to avoid accumulation hotspots. Beirut was for many cargo insurers worryingly reminiscent of the Tianjin explosion, a prime example of accumulation risk. Many insurers were left wondering where their cargo was and how much of it was at risk. The fallout from Beirut has been less costly, but will remind insurers that port-based CAT losses are not rare. With very limited scope for recoveries, marine underwriters have been looking to develop their underwriting methods to better limit their exposure to these unexpected large loss events.


Health providers will be a target for COVID-19 litigation

While NHS and independent health providers continue to contend with the pandemic, due to thousands of coronavirus related deaths and illnesses, unless governments grant a form of immunity it is inevitable that some claims will be pursued against providers and their insurers.  These may be directly related, concerning the management of a patient with the virus, or they may be indirectly related, for example in the treatment of a patient whose unrelated condition goes undiagnosed where resources are deployed dealing with COVID-19.  It is therefore critical that providers continue to document their risk assessments, their actions, and decision-making, so that these can be judged contemporaneously and not with the benefit of hindsight.


Will the new rules on jurisdiction bring more or less certainty?

From 31 December 2020, the EU regime will no longer apply to English proceedings. Instead, the choice is between applying English common law rules on jurisdiction; or, where it applies, the Hague Convention on Choice of Court Agreements. The Hague Convention only applies where the parties have made an exclusive choice of court agreement.  In other cases, English common law rules will apply.  This opens the door to defendants being able to argue that England is not the appropriate forum, which was outlawed under the EU regime. Expect certainty where parties have chosen to litigate in a Hague contracting state, greater uncertainty and satellite litigation where they have not.


Mind the (social unrest) gap!

With continued civil discontent brewing across the globe, the (re)insurance market will need to reassess its strikes, riots and civil commotion (SRCC) product offerings and policy wordings to plug the growing protection gap – but at what price for insureds? This trend is driven by complex factors, including anger at income inequality, food insecurity, political corruption and the overreach of the state, as well as increasingly polarised ideological battles. As we predicted last year, social unrest has continued to grow globally and to have widespread insurance implications as it becomes ever more fractious. The coronavirus pandemic and resultant lockdowns may have put a lid on things, but the pressure is building as resentment blooms at the economic fallout of the pandemic. 2020 has been a catalyst for a hardening market and now coverage gaps are appearing for insureds. Over the next twelve months, we expect to see a recalibration of the market as insurers perhaps start to add SRCC endorsements at a premium, fold such perils into political violence policies or offer entirely standalone cover. Meanwhile, insurers would do well to audit existing exposures and revise wordings to respond to the risks of social unrest more adaptively in different jurisdictions around the world.

An African perspective: COVID-19 will accelerate growth of SME business property insurance in African markets

Although the African insurance market has grown over the last decade, the majority of African SMEs still view insurance as a nice add-on, as opposed to a ‘must have’. However, the COVID-19 pandemic has highlighted the importance of insurance cover. The pandemic ignited longstanding disaffection with a range of African governments’ policies, resulting in protests in some countries. In Nigeria, for example, protests turned violent and resulted in damage to commercial premises, most of which were uninsured SMEs. With limited assistance from the government to get them back on their feet, it is fair to say that these businesses are now seeing insurance as less ‘nice to have’ and more ‘should have’.

A Chinese perspective: China’s property and casualty insurance market set to grow

Being ‘first in, first out’ with the COVID-19 pandemic, China reported a 4.9% growth of its economy year on year in the third quarter of 2020, with an annual expansion of 1.9% forecast by the International Monetary Fund.  China’s property and casualty market is also expected to grow 8.8% annually from 2020 to 2030 in gross written premium.  As a result of COVID-19, major floods during the summer, and, interestingly, the accounting scandal of Luckin Coffee (when many of the public first learned about D&O insurance), the public’s risk awareness is likely to have further increased. Coupled with the government’s efforts to boost domestic demand via a new ‘dual circulation’ model, the strategy to shift investment to high tech industries, and reforms to permit 100% shareholding ownership by foreign insurers in China, this might lead to a greater presence of Western insurers in China in service lines where domestic players are less experienced, including liability (such as product liability, D&O and cyber), contingency and business interruption.

A French perspective: the French Treasury is working on a new insurance regime to be implemented in 2021

The French Treasury will announce the creation of a new insurance regime to cover business interruption losses, following the increase in disputes between insurers and insureds in relation to COVID-19.  This plan would benefit small and medium-sized companies and would take the form of a capped lump sum, not covering all losses. Two regimes are being discussed. The first is a public-private collective and compulsory insurance regime (similar to the existing ‘CatNat’ for acts of god losses), where the insured would pay a flat-rate premium that the State would top up and insurers would compensate for business interruption losses by paying a lump sum calculated individually. The second is an optional regime, encouraging companies to pay premiums for health risks in return for a tax advantage.  The new regime should be introduced in spring 2021. However, at this stage there is no certainty as to the nature, form and scope of coverage.

A Latin American perspective: the silver lining on social unrest

In the past year we have seen different levels of social protests in countries such as Bolivia, Chile, Ecuador, Peru and Venezuela, leading to a large number of property losses and business interruption. All of these have had a significant impact on both the local markets and reinsurers. It is very likely that such events will continue as these are emerging economies with ‘growing pains’ and there are a number of upcoming elections. However, this may be the very opportunity for the market to provide more comprehensive, sophisticated and, in all, better products to large and medium size companies. Such events force the industry to think outside the box in order to provide better insurance products covering risks such as riots and civil commotion or to consider different ways of covering multiple event losses. It will also be interesting to see how such events impact D&O policies, when large companies are forced to take decisions about their workforce.


Cyber war exclusions will require fresh thinking globally

The potential impact of state-sponsored cyber attacks against critical infrastructure has focused global attention on the need for up to date cyber war exclusions.  This reflects concerns that cyber war represents a systemic risk which the market should limit or exclude.  In the UK, the Lloyd’s Market Association is reviewing the prevailing war exclusion, NMA464, drafted long before cyber risk became a daily part of business life. This had been considered no longer fit for purpose even before the NotPetya incident in 2017.  Drafting the new exclusion has raised challenging issues, including the attribution of any attack, and debate is likely to rumble on, with many academic papers highlighting different possible solutions.  Accommodating the competing needs of insureds, insurers and reinsurer is unlikely to lead to a single clause being universally adopted.  Given the evolving nature of cyber risk, further clauses adopting different approaches, or adding further refinements, will be needed. 

State-backed reinsurance solutions likely to expand

The COVID-19 pandemic has heightened discussions about the role of the state in supporting the (re)insurance market to provide solutions to mega-risks that are beyond the scope of the private insurance market to reinsure. The UK Treasury produced a discussion document just before lockdown in March seeking to bring together the current fragmented approach to risks that fall beyond the capabilities of commercial (re)insurers to absorb. Long-term export credits, terrorism and flooding are already subject to schemes ultimately underwritten by Government. Cyber was already being widely discussed as the next risk that would need a similar solution and now pandemics have been added to the list. The discussions could lead to the consolidation of state support into a single entity.


W&I claims will increase as businesses feel the after effects of the pandemic

After an initial lag in notifications at the start of lockdown, we have seen in the UK a real increase in claims instructions from warranty and indemnity insurers, often involving deals concluded outside the UK, as buyers begin to review their acquisitions with a keener eye in the economic downturn.  Transactions with international elements can make it difficult to determine an accurate picture of a covered loss and law firms that can draw on a strong network of expert contacts that can ascertain the true position quickly will give transactional risk insurers the best opportunity to manage reserves actively.

A German perspective: increase in distressed M&A and synthetic warranties

The COVID-19 pandemic has led to a significant decrease in overall economic activity across the globe and consequently a decrease in M&A activity which certainly affects the transactional risk market. However, there are certain sectors (such as healthcare, IT and renewable energy) that show strong M&A activities again and are likely to develop. It is likely that the main drivers will be distressed and carve-out transactions (the latter because companies will likely refocus on strengthening their financial capacity and return to strategic roots by divesting non-core business units). Corresponding to the expected increase of distressed transactions, the demand for so-called synthetic warranties will increase (i.e. warranties are not given by sellers but are only agreed ‘synthetically’ between the insurer and the buyer in the W&I policy). Further, we expect an increased demand for contingent liability risks (i.e. known risk cover) in distressed M&A transactions.

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