Global Risk

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

Global Risk predictions

Hard reign? Macro changes in construction insurance?

A generation of global construction contractors and professionals have benefitted from long established soft insurance market rates. However, the global commercial environment may now spawn a period where harder rates may reign – at least in some classes. A wave of significant construction professional indemnity claims and project works losses following natural catastrophes (such as hurricanes Harvey, Irma and Maria) are changing the sector. Architects, engineers and design and build contractors are all facing premium rate hikes, while many construction all risk subscribers have left the market, reducing the previous over-capacity. Rate increases, tighter underwriting and more onerous insurance terms may prevail for a while. The additional costs will affect the bottom line for many construction and development businesses, bad news for them, in a sector straining under the weight of Brexit, investment downturn, skills shortages and increased costs.


Brexit: the UK’s departure from the EU will mark only the beginning of protracted uncertainty

Serious negotiations about the UK’s future trading relationship with the EU will only properly begin once the UK ceases to be an EU member on 31 January 2020. This phase will need to address a long list of issues impacting the insurance industry such as the current absence of equivalence regimes under legislation such as the Insurance Distribution Directive; the effect on personal lines insurance such as travel, health and long term insurance and pensions; and how information which is fundamental to international financial stability and consumer protection should continue to be shared between national regulators. With the UK Government adamant that this phase has to be completed by the end of December 2020 (and in practice much earlier if member states are to have time to ratify the new agreement), it is unlikely that all these issues will be addressed. To help ease some of the business uncertainty and confusion, the Prudential Regulation Authority and the Financial Conduct Authority have implemented a Temporary Permissions Regime to allow EU financial services firms to continue to enter into new business and renew existing business for up to three years after passporting rights fall away.  They have also introduced a run-off option and a standstill proposal to give firms time to adjust to the UK’s post-Brexit regime. But these measures are only just the beginning of what is needed to see businesses properly transition into a post-Brexit world.

Political uncertainty will continue and insurers will need to keep close to events, especially Gibraltar

Commercial war between US and China, Brexit, secessionist tensions in Spain and potentially in other European countries will continue to unsettle markets and business relationships. In particular, any post-Brexit trade negotiations could throw up some unexpected surprises. One of those could be the future of Gibraltar. The EU has told Spain it will have a veto over applying the future EU-wide trade deals to Gibraltar. This will give Spain some crucial leverage to tackle their long-running grievances over smuggling and tax evasion. With the amount of UK insurance – especially motor – now written in Gibraltar this is an issue that will need careful monitoring In addition, political uncertainty threatens business continuity. This presents an opportunity to think about potential disruption to supply chains. In this difficult global landscape, what could risk managers do to keep doing ‘business as usual’? The current market situation is likely to require a significant change in insurance products and the redesign of long-established business models.

Scottish Nationalists renew calls for independence vote

The Scottish First Minister and leader of the Scottish National Party, Nicola Sturgeon, has signalled her determination to hold a second referendum on independence in 2020. A referendum on Scottish independence requires a transfer of power from Westminster through a section 30 order. This has so far been ruled out by the UK Government and the large Conservative majority now makes that look unlikely to happen in this Parliament. If a vote does take place, many expect the result to be closer than the previous rejection of independence by 55% to 45% in September 2014, although it is worth noting that the SNP share of the vote in the December 2019 general election was 45%, suggesting support for independence has not moved much. Any prospect of a pro-independence vote will prompt many firms, including financial institutions, to review their domicile. In 2014, many firms optioned office space in London as a contingency and we are likely to see that happen again should there be a second independence referendum. There will also be assessments of the risks around plans for a Scottish currency, central banking arrangements and taxation.


Shopping in the UK

The Supreme Court decision in Vedanta v Lungowe signals an increasing trend of foreign litigants being permitted to pursue group actions in the UK courts.  At the heart of the decision to allow a group action by Zambian citizens to proceed against a UK-domiciled parent company and its Zambian subsidiary was the desire to ensure access to justice.  The case also gives foreign claimants renewed encouragement to pursue UK companies by opening up the test for parent company control.  Combined with the global reach of claimant law firms and litigation funding, we fully expect to see more claimants coming to the UK for their forum shopping.


An Australian Perspective: Static risks will blur the lines between property and marine coverage

Increasingly, inland marine insurance is being relied on to address storage, processing, transportation and logistics risks. This means marine insurers are covering static risks, essentially providing property cover when goods that are moving from A to B sit in a warehouse or storage yard for a period of time as part of that journey. This exposes them to risks ranging from fire to insect infestation and can blur the lines between property and marine coverage. In Australia, there are also liability risk exposures for carriers and recovery options against carriers breaking limitation of liability clauses. Similarly, under Australian Consumer Law, carriers have service guarantee responsibilities. It’s likely Australian courts will also test the expansion of consumer rights in this space.


New trade rules with the EU may interrupt the supply of vehicle parts, increasing the duration and cost of vehicle repairs and credit hire claims

Any changes in the trading relationship with the European Union (EU) as a result of Brexit will impact adversely on the supply of ‘just in time’ vehicle parts both from manufacturers based within EU member states and countries outside the EU that have trade agreements with the EU.  Such interruptions and delay in the supply chain will result in a lengthening of vehicle repair times which will in turn lead to an increase in the number and duration of credit hire claims adding to the cost of claims for insurers and, ultimately, consumers.


China will offer insurers opportunities and challenges

China’s Belt and Road Initiative, Made in China 2025 Strategy and Foreign Investment Law 2020 have significant implications for the global insurance market. Chinese manufacturing is moving up the value-chain, with investment in high-end production of specialised goods and innovation in fields such as robotics, clean energy (including electric vehicles), new synthetic materials and emerging bio-medicine as well as rail, aerospace and maritime engineering. These industries are central to the “fourth industrial revolution” – the integration of big data, cloud computing and other new technologies into global manufacturing supply chains. Chinese insurers are leading the way in adopting automation into their own processes and in the launch of new, technology-driven solutions and insurance products (such as “First Set” cover). The global insurance industry needs to incentivise the take-up of product liability and recall insurance by Chinese manufacturers, not only as an essential facilitator of product innovation and technological advancement but also to drive improved quality standards and instil consumer confidence in “Made in China” goods.

Microplastics will lead to a range of insurance exposures and the issues will be complex

The prevalence of microplastics puts the risks they create at a systemic level. They include environmental risks, such as marine pollution, which will lead to environmental, loss of income, liability and product liability claims. There are also the risks to human and animal health, which will lead to personal injury claims, workers compensation claims (particularly for workers processing nylon flock, plastic fibres and synthetic textile) and product liability claims.Microplastics create some similar risks to silica dust because the tiny particles can be airborne and easily inhaled. However, unlike silica dust, microplastics are a group of substances identified generically, rather than individually. This will lead to issues of causation and liability, as well as highly contested expert evidence regarding economic loss.

Lithium-ion battery technology will keep driving efficiencies, but the risks must be better managed

Lithium-ion batteries will continue to be embraced as efficient and cost-effective ways to store energy as a power source. However, while the new technology is transforming many industries it is not without risk.  Lithium battery failure and overheating results in a process called “thermal runaway”, which can produce enough heat to cause adjacent batteries to explode. An enormous issue is that these fires require specific training, planning, storage and extinguishing interventions as water makes the fire worse. The challenge requires government agencies to better define safety standards and for manufacturers to rigorously test their products. If not, product recalls, liability and property claims will follow. Safety issues must also be addressed at the recycling phase, given the short life of the batteries.


To riot or not to riot?  

Hard Brexit, or not hard Brexit? To Trump, or not to Trump? One way or another the unusual tensions and divisions brought into sharp focus in Western politics over the last few years are likely to become exacerbated. Inevitably, significant numbers will feel their side of the argument has been ignored by politicians and history teaches us that where social or political emotion runs high, then civil unrest should never be discounted. We saw it in London in 2011 where riots led to £200m in property losses and a further £50m in business interruption. More recently, Extinction Rebellion orchestrated various demonstrations with the potential to cause both property damage and business interruption losses.  Further afield, Chile’s social unrest, Bolivia’s uncertainty over election results and the doubling of fuel prices in Ecuador have led to violent protests.  Perhaps post Brexit, we will see the first test of the new laws and procedures under the Riot Compensation Act 2016 (supported by the 2019 CII Riot Claims Handling Best Practice Guide), designed to streamline and modernise riot-related claims.


Warranty & Indemnity claims will increase as businesses grapple with difficult global economic conditions

Warranty & Indemnity insurance, which insures losses arising from breaches of warranties (and other liabilities) in M&A deals, has gained significant popularity in recent years.  High volatility in the global economy means frequent claims in the future for this product as ongoing difficult economic conditions see financial targets fail to match up to buyers’ expectations.  It does not need well publicised failures, such as HP’s purchase of Autonomy, to encourage sales of this product.  Underwriters are in the meantime feeling the brunt of enhanced terms and pricing pressure in this competitive but relatively young market.  There will be an increased spotlight on claims, especially around response times, which may require early and conservative reserving and responsive advisers who understand the sector.  It will be interesting to see how the coverage enhancements play out into the claims arena.

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