Picture a world where sophisticated machine-learning algorithms generate hyper-realistic video footage of you doing things you’ve never done and saying things you’ve never said.
If that sounds like a nightmare, I’ve got bad news for you. That world is increasingly our world. Those videos, called “deepfakes,” are already being created, often for unsavory purposes.
(You can watch a deepfake video of former president Obama giving a fake speech here.)
Anyone can download the software needed for DIY deepfake videos. And even though deepfake technology hasn’t yet been perfected, it’s getting better every day.
This has obvious implications for national security. Indeed, congressmen have already expressed concerns about the use of deepfakes as weapons of international intrigue.
What about insurance – could deepfakes be the next frontier of risk? It’s not hard to imagine some scenarios:
Cyber: A deepfaked audio recording of a CFO directs a company’s billing department to route thousands of dollars to a fake bank account.
Directors and officers: A deepfake video is created of a large corporation’s CEO reporting (fabricated) negative financial results, leading to a significant drop in the company’s stock.
Employment-practices liability: An employee is “deepfaked” to portray him making disparaging remarks about coworkers and engaging in harassment.
General liability: Someone creates a deepfake video of a person slipping in a grocery store and “injuring” herself, leading to allegations of negligence.
I’m sure you could think of a hundred more like these. How will we adapt to a world where video and audio can’t be trusted to tell the truth? What if deepfakes become too sophisticated to detect – how will this impact insurance claims and fraud prevention?
If the worst comes to pass, deepfakes could soon become an insurance nightmare.
Now let’s talk a little bit about homeowners insurance and marijuana.
Except for Manitoba and Quebec, all Canadian provinces will let people grow a small amount of marijuana at home – usually up to four plants.
Unfortunately for the aspiring bud-growers out there, growing pot isn’t as easy as growing basil. Marijuana is a fickle weed and needs a lot of care to grow into a viable plant. It can be grown outside or on the window-sill, but a healthy and vibrant marijuana especially likes a hot, light-intensive, steamy environment – not exactly an accurate description of Canada’s climate.
Which is why a whole industry has grown up around providing home-growers with hydroponic, lighting, and climate control systems to grow pot indoors, safely tucked away from the blinding snows and sub-zero temperatures of a Canadian winter.
How will home-grown marijuana affect homeowners insurance?
Higher risks. Well, for one, these grow systems are definitely not risk-free. High-intensity heat lamps can mean a strung-out electrical system, which can lead to fires. Humid temperature controls mean lots of moisture, which can damage your house with mold and fungi growths.
Higher premiums. Higher risks mean that an insurance company will probably ask for more premium to make up the difference. A spokesperson for the Insurance Bureau of Canada has been quoted as saying that insurers asking about home-grown pot may become routine: “[insurers] just want an accurate idea of what you’re doing and any risk factors that should go into determining your premium […] they’re going to underwrite your policy based on a number of factors. It’s just another factor that gets consideration when setting an insurance premium.”
Coverage questions. It’s also important to know what your insurance does and does not cover. For example, some damage caused by mold or fungi is often excluded by a standard homeowners policy. And most policies limit the amount of money an insurer will pay for damaged plants. This limit might not always be high enough to reimburse for marijuana plants, which can be pretty valuable.
So if you’re a Canadian planning to use a marijuana grow system at home, talk to your insurer – especially if you’ll be installing complicated equipment.
Insurance claims are happening more often and they’re getting a lot more expensive – fast. The consequences are alarming. Premiums are rising for consumers and businesses. Coverage is getting scarce for some risks. Some insurers are increasingly concerned about how to keep liability insurance sustainable into the future.
But why are bigger claims happening more often? And what can the insurance industry do about it?
Advisen Ltd. held its inaugural “Big Nasty Claims Conference” on September 20 to explore these and other questions, featuring expert insight from across the insurance value chain: defense counsels, brokers, claims and insurance professionals, and risk managers.
Plaintiff’s attorney litigation strategies have evolved – and are paying off big
You’ve seen the headlines. $4.69 billion verdict for women alleging that talc baby powder caused ovarian cancer. $101 million verdict for a driver allegedly injured after his car was struck by a truck. The list could go on for what seems like forever.
And if it feels like these are unprecedented numbers happening at unprecedented rates, that’s because they are. There’s been a remarkable uptick in punitive damages from claims that went to trial, noted Jonathan Drummond, Head of Casualty – North America at Willis Towers Watson.
John Manning, keynote speaker at the conference and partner at Manning Gross & Massenburg LLP, made the case that some of this uptick is because of new plaintiff’s attorney litigation tactics. Using the so-called “reptile strategy” (based on this 2009 book), plaintiff’s attorneys have been successfully creating massive risks from what used to be fairly straightforward claims.
The reptile strategy involves appealing to what is known as the reptile brain — the part of the brain said to favor safety and survival over logic. What this often means in the courtroom is a subtle distortion of legal standards and burdens of proof. Manning argued that this allows plaintiff’s attorneys to essentially re-define “negligence” in the jurors’ minds to mean the failure of a company to be absolutely perfect and absolutely safe (a far cry from the actual legal standard).
Naturally, this standard of perfection is impossible to uphold. But the reptile strategy’s use of emotional appeal to waive away the need for actual causation can influence the jury to demand compliance with the impossible – and hence multi-million or billion-dollar verdicts against companies whose products might have posed only the slightest possible risk of danger, if at all.
This is particularly true in what Christopher Morrison, Senior Vice President at Swiss Re, called “high sympathy, high damages” claims with low liability – that is, claims where liability is pretty straightforward. He explained that these are the cases where the plaintiff’s attorneys are willing to take risks to move the needle away from traditional legal standards because, to win a big settlement, liability needs to be proven beyond the scope of the actual facts of the case.
The consequences of this strategy are impacting traditional legal standards themselves. Manning said that, in his view, the reptile strategy is “the number one factor in moving the line of demarcation of burden of proof for negligence and causation analysis.” “There’s a lot more ‘next asbestos’ if they [the plaintiffs’ bar] don’t have to prove medical causation at the trial,” he added, referencing the recent ruling regarding Monsanto’s Roundup weed killer.
Same old claims, new massive losses
These massive verdicts coming out of claims litigation are having a trickle-down effect. Claims settlement costs are also increasing, absent any trial – because huge verdicts mean a new “floor” for what a plaintiff’s attorney will demand in settlements. As Mia Finsness, Managing Director of Casualty Claims at Markel Corporation, noted, “one runaway verdict can drive the whole discussion on what settlements look like – you get massive settlements before you get to trial because plaintiff’s attorneys will just say they want huge money and that sets a floor.”
“Loss costs in casualty have always been increasing,” said Andy Barberis, Executive Vice President of Commercial Claims at AIG, “but over the last five to 10 years the increase has been exponential.” There doesn’t seem to exist a cap on where loss costs could end, he added, and these recent trends are of significant concern for the future sustainability of the insurance industry.
And not all verdicts need to be massive to have an effect. It was a running theme throughout the panels that claims that once cost $1 or $2 million to settle are now going for much more. “Things that used to be routine, we’re seeing a doubling or quadrupling of the verdicts,” said Kevin A. Maloney, Senior Vice President at Allied World. Over time, these individual increases can add up to big losses.
One panel was asked if “litigation financing” might have something to do with increasingly aggressive claims settlement on the part of the plaintiffs’ bar. (Litigation financing is when third-parties fund a plaintiff’s lawsuit in exchange for a portion of a settlement.) The short answer: a lack of transparency about when litigation is being financed by outside parties makes it hard to know if this is a widespread phenomenon. “Transparency is a real issue regarding funding. It’s hard to know they [financiers] even exist because right now there are few requirements for disclosure,” Finsness said.
Several lawyers said they had only incidentally found out third-parties were funding litigation, such as when a plaintiff’s attorney was very aggressively pursuing a high settlement and admitted to being funded.
Tort reform is unlikely, so strong legal defenses are crucial
Could tort reform help rein in aggressive litigation and massive verdicts? The mood at the conference was that the prospect for enactment of any meaningful tort reform is becoming an ever more unrealizable reality.
Instead, strong legal defenses that recognize and counter reptile strategies and other plaintiff’s attorney tactics are crucial.
For one, the conference experts stressed unity among parties to a defense; that is, making sure everyone is on the same page to preclude a plaintiff’s attorney from “driving a wedge” between the defense. Communicate “early and often” was also stressed– insureds, brokers, risk managers, and counsel need to share information and coordinate defense strategy as early as possible.
In other words, be more strategic. Plaintiff’s counsel on the other side of the fence, observed William Passannante, an attorney with Anderson Kill P.C., “will pool resources and share information and contact each other to form a united front,” especially when there’s potential for a big settlement. “I don’t know if I see the same willingness among defense counsels,” he added.
Finsness agreed, arguing that effective defense counsel and coordinated strategy are crucial components of satisfactory claim settlement.
Emerging risks might completely change the litigation landscape
Panel members were asked what they think could be the “next asbestos” to hit the insurance industry:
Talc-related litigation – the potential population of plaintiffs dwarfs that of the asbestos population.
The opioid crisis continues to increase litigation and claims exposure for many books of business.
Concussion litigation, especially with the increased attention on long-term brain injuries suffered by football players.
Climate change litigation, particularly the recent cases seeking to hold individual companies liable for alleged climate change-related damages.
Exposure “leakage,” in which old issues crop up in new contexts. Finsness noted that PFOA (chemicals used in a number of products) contamination could potentially become a product liability issue.
Premises security. Will venues become liable for shootings or other acts of violence on their premises?
The upshot being: claims are happening more often, are getting more expensive – and may be cropping up for new exposures that could haunt the insurance industry for decades to come.
As the world’s population becomes increasingly concentrated in cities, they become more vulnerable to risk events. To understand the risk, Lloyd’s compiled a City Risk Index, detailing the threat landscape for the world’s leading 279 cities.
The index estimates how much economic output (GDP@Risk) a city could potentially lose due to 22 different threats ranging from stock market crash to solar storm.
Here are some highlights from the report:
Across all 279 cities, $546.50 billion is at risk from all 22 threats.
Man-made threats account for 59 percent of the total GDP@Risk – with market crash the largest single threat, with cities exposed to losses of $103.33 billion on an annual basis.
The 10 cities with the highest exposure have a combined $126.82 billion of GDP@Risk, almost a quarter of the global total, with Tokyo standing to lose more than any other city.
Climate-related risks account for $122.98 billion of GDP under threat, and this sum will grow as extreme weather events grow in frequency and severity.
If cities were to improve their resilience, global GDP exposure to loss would drop by $73.4 billion.
Accumulation risk, where a single event triggers losses under multiple policies in one or more lines of insurance, is emerging in new and unforeseen ways in today’s interconnected world, says a post at Swiss Re Open Minds blog.
From Ruta Mikiskaite, casualty treaty underwriter, and Catriona Barker, claims expert UK&International Claims at Swiss Re:
For example, Kilmore East-Kinglake bushfire, the most severe of a series of deadly wildfires in the Australian state of Victoria on Black Saturday, 7 February 2009, led to a settlement of A$500 million—the biggest class action settlement in Australian legal history.
Per Swiss Re’s post, the Royal Commission found that the fire was caused by poorly maintained power lines owned by power company SP AusNet and maintained by asset manager Utility Services Group. The Victoria State government was also held liable for its failure to provide sufficient prevention measures and inadequate warnings during the fires.
Apparently, the courier company did not have cyber insurance or any other insurance that would cover losses from Petya, according to this report by The Wall Street Journal, via the I.I.I. Daily.
A new emerging risk report from Lloyd’s and risk modeling firm Cyence notes that cyberattacks have the potential to trigger billions of dollars of insured losses, yet there is a massive underinsurance gap.
Take its first modeled scenario: a cloud service provider hack. The event produced a range of insured losses from $620 million for a large loss to $8.1 billion for an extreme loss (overall losses ranged from $4.6 billion to $53 billion).
This left an insurance protection gap of between $4 billion (large loss) and $45 billion (extreme loss), so between 87 percent and 83 percent of the overall losses respectively were uninsured.
In another modeled scenario, the mass vulnerability attack, the underinsurance gap is between $9 billion for a large loss and $26 billion for an extreme loss, meaning that just 7 percent of economic losses are covered by insurance.
I.I.I. research manager Maria Sassian and I.I.I. chief actuary James Lynch take a closer look at man-made earthquakes, based on a presentation by Kelly Hereid, Chubb Tempest Re at Reinsurance Association of America’s Cat Risk Management 2017 conference:
In Oklahoma, for each barrel of oil extracted by energy companies, seven to 10 barrels of wastewater are produced. Oil and gas companies use a technique called ‘dewatering,’ which allows a cheap separation of oil and water, making old geologic formations economic. The water, which sits underground for millions of years getting saltier and nastier with the passage of time, must be disposed of safely. Oil companies send it to disposal wells where it is injected deep into the earth. This disposal process has been linked to an increase in earthquakes because the injected wastewater counteracts the natural frictional forces on underground faults and, in effect, “pries them apart”, thereby facilitating earthquakes. Because of wastewater disposal earthquakes on natural faults are occurring faster than they would have happened otherwise.
The spate of earthquakes in Oklahoma (Figure 1) over the past few years has driven earthquake insurance take-up rates in that state from 2 percent to 15 percent (higher than in California). According to NAIC data from S&P Global Market Intelligence and the I.I.I., direct premiums written from earthquake insurance in Oklahoma increased by over 300 percent from 2006 to 2015 (Figure 2). The Oklahoma market has been declared noncompetitive as only four companies combine to write a 55 percent market share. The action gave the state Insurance Department the right to approve rate changes in advance. Some insurers suggested a better solution would be to encourage competition rather than increase regulation.
Due to the volatile nature of the risk there is potential for insurance market surprises. Earthquake liability could harm energy prices and create an environmental risk problem for insurers. Some economists argue that housing prices could fall by nearly 10 percent following strong (MMI VI) shaking, which is not uncommon in magnitude 5+ earthquakes. Lawsuits over loss of value could get big fast.
The 2016 Pawnee earthquake was the largest in the Oklahoma historical record with a magnitude of 5.8.
One of the problems for insurers is that lots of wells are injecting so it’s tough to tell which company caused the earthquake. It’s also tough to tell if an earthquake has been induced since an induced earthquake looks the same on a seismograph as a natural earthquake. The USGS 2014 seismic hazard update is being incorporated into earthquake risk models now, but the update doesn’t contemplate induced earthquakes, which are now covered in USGS annual rate forecasts instead.
In recent years, the rate of injection has fallen due to regulation in the form of a mandated 40 percent decrease in wastewater disposal in key earthquake regions, falling oil prices and new geologic targets which produce less water. And it looks like reductions in injection volume are reducing activity. However, some experts believe the damage has already been done. Above-normal earthquake activity may continue for several decades, with fewer but potentially stronger earthquakes.
Oklahoma is a hotspot for earthquakes linked to wastewater disposal, but it’s not alone. Concerns in Texas led to the closing of a wastewater injection site near the Dallas-Fort Worth International Airport and there is evidence that some of the earthquakes that occurred in California decades ago may have been induced.
Amid ongoing political upheaval in Venezuela and a volatile geopolitical landscape elsewhere, the need for political risk insurance is rising to prominence for multinational companies.
AP reports that General Motors just became the latest corporation to have a factory or asset seized by the government of Venezuela.
GM said assets such as vehicles were taken from the plant causing the company irreparable damage.
To protect themselves against loss or damage to physical assets caused by political action and instability, businesses should consider purchasing political risk insurance.
This specialty type of insurance can protect against a variety of risks, including:
Political violence (including terrorism and war).
Contract frustration due to political events.
Due to the accelerating pace of geopolitical uncertainty, the market for political risk insurance is pushing toward $10 billion in 2018, up from $8.1 billion in 2015, according to a KPMG LLP report published last year.
Willis Towers Watson advises multinational companies to buy political risk coverage on operations worldwide — particularly for select regions —while it is still available, Business Insurance reports.