To paraphrase Charles Dickens in “A Tale of Two Cities,” many think that 2017 may be the best of times, while others think it will be the worst of times. And only the passage of time will tell.
But for insurance and finance professionals, a wait-and-see strategy is not likely to be effective; they need to plan ahead.
Although no one has a true crystal ball, New York City-based Marsh has released its annual state of the Financial and Professional (FINPRO) liability insurance market. From cyber risk to the changing regulatory landscape to increasing liability challenges for directors and officers, risks continue to evolve within the financial and professional liability insurance marketplace, the report notes.
Here are the trends that The U.S. Financial and Professional Market in 2017: Our Top 10 List sees as what’s in store for the year ahead.
1. D&O rate decreases to continue
Public directors and officers (D&O) liability insurance rates are expected to keep falling in 2017, continuing nine straight quarters of rate decreases. However, as seen in the third quarter of 2016, the rate of decline will likely continue to moderate incrementally.
Although there was a spike in federal filings in 2016, the impact from those claims will take months, if not years, to be reflected in insurance rates.
(Photo: Claims Magazine)
2. Broader D&O policies
The days of “pure” individual D&O coverage are gone, according to the report. Insurers will likely continue to broaden and differentiate their D&O offerings to remain competitive. Some options include the following:
- Providing or improving entity investigation cost coverage, possibly to include non-formal investigations.
- Adding reinstatement of limits for full coverage.
- Excess insurers reimbursing an insured a percentage of their retention if they’re able to successfully obtain an early. securities class action dismissal with prejudice.
- Continuing increases in excess derivative investigative cost sublimits.
(Photo: AP/Andrew Harnik)
3. Changing securities regulation
Securities regulations and resulting enforcement and claims will likely change under President Donald Trump’s administration and a Republican-controlled Congress. According to the report, some type of deregulation for financial institutions and other organizations is likely. This could come in the form of fewer corporate penalties while continuing to hold culpable individuals accountable.
It’s also likely that the U.S. Securities and Exchange Commission (SEC) whistleblower program will continue in some form — possibly requiring whistleblowers to first report purported wrongful conduct internally.
Although deregulation may ease the regulatory burden on businesses in an effort to stimulate growth, it could lead to a rise in resulting claims due to a potential decrease in transparency and mandated corporate guidelines.
4. Activism on the rise
Shareholder activism has become one of the most important issues confronting corporate officials. Shareholder activism in the U.S. and abroad is increasing as shareholders continue to influence corporate conduct and decision making.
However, activism is not just limited to shareholders, the report notes. For example, with recent environmental activism in the energy sector, shareholders and regulators are targeting companies and directors for purported failures to accurately disclose climate-change-related risks to investors. Regardless of the type of activism involved, the result will likely be an increase in litigation and regulatory activity globally.
(Photo: President Donald Trump and Andrew Puzder, right. AP/Carolyn Kaster, File)
5. New Labor chief
Andrew Puzder, CEO of CKE Holdings (the parent company of Carl’s Jr. and Hardee’s), has been nominated to head the U.S. Department of Labor (DOL). If confirmed, Puzder could impact the frequency and severity of employment, wage and hour, and fiduciary liability litigation.
Puzder has been an outspoken critic on several federal employment initiatives, including the regulation expanding overtime protection, according to public reports. The regulation was supposed to go into effect Dec. 1, 2016, but was blocked on a nationwide basis by a Texas federal district judge just days before its effective date. As many companies had already planned to take action in preparation for its implementation, this wait-and-see position creates a significant amount of uncertainty.
6. Mergers and acquisitions
Merger and acquisition (M&A) activity — in the U.S. and abroad — is expected to remain robust in 2017. Companies will likely be eyeing smaller, more tactical M&A opportunities, the report predicts. This may fuel continued interest in representations and warranties (R&W) insurance to help facilitate the deal close and differentiate a bidder’s proposal.
From a D&O perspective beyond traditional M&A, companies will seek alternative structures such as joint ventures, partnerships and alliances. It will be increasingly important to review the D&O policy to ensure that any unique structure is properly covered.
Additionally, issues with integration can present an increased risk for shareholder claims if expectations are not met and a stock drop reflects that.
7. Cyber insurance evolution
Cyber insurance was once thought of as a way to protect your company against losing customers’ credit card, personally identifiable and health information. Organizations in 2017 are increasingly considering the threat of business interruption as a result of a security breach.
Risk professionals will need to address evolving cyber risks across multiple platforms, as the business interruption may be caused by both physical and nonphysical perils. As a result, organizations will need to work with their insurance advisors to bridge financial and professional and property insurance programs to prevent potential gaps in coverage.
The report also predicts that big data analytics will play a larger role in underwriting. Cyber insurance has suffered from a lack of statistically significant actuarial data; however, insurers have begun to explore alternative sources of analytics to aid in their evaluation of an applicant. As underwriters look to issues of threat environment, resiliency, and the general digital hygiene of the applicant, they also look to the interconnectivity of organizations and worry about the possible aggregation of risk across their book.
8. Excessive fee claims increasing
The trend is clear: Employee Retirement Income Security Act (ERISA) fee litigation settlement amounts are rising. With the increased pool of plaintiffs law firms now focusing on excessive fee litigation — some of which are advertising via Facebook and LinkedIn in search of new participants — the worrisome potential exists for volume filings of claims with the goal of getting a quick payout for the plaintiffs and their law firms.
Given the large dollar amounts that are held in 401(k) plans today, and the recent successes of plaintiff firms, fee cases remain sufficiently attractive for plaintiffs’ lawyers to pursue.
9. Financial and technology risks
As most insurance professionals are aware, financial and technology (FinTech) industries are converging at an increasing pace. Traditional players in both industries are looking at new revenue opportunities and ways to improve their current offerings and systems. And new firms are emerging with inventive and disruptive business models designed to reshape the financial services industry and meet changing consumer demands.
Although these shifts spark innovation, defensive positioning, and competition, they also have changed the risk landscape for financial and technology organizations. Moving into 2017, the report predicts that financial companies will increasingly see exposures that were historically the domain of the technology industry; technology companies will continue to move into highly regulated areas that they may be unfamiliar with. This has left financial regulators — including the Federal Deposit Insurance Corporation, Federal Reserve, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and state agencies — struggling to classify new players whose risk profiles combine the two sectors.
10. An interconnected world
It should come as no surprise to insurance professionals that global enforcement agencies are cooperating with one another and pursuing what they believe to be wrongful conduct around the world. Often they are jointly sharing information and tactics in real time, the report notes, which can lead to increased D&O and errors and omissions (E&O) insurance claims as measured by both frequency and severity.
One such tactic — referred to as “a game changer” by the SEC — is rewarding whistleblowers. In what may be a meaningful development, the Ontario Securities Commission in Canada has now opened its own Office of the Whistleblower capable of paying bounties of up to $5 million, and Australia is considering doing so as well.