Cyber Risk Gets Real, Demands New Approaches

With the cyber risk environment worsening significantly, a recent A.M. Best report says, “prospects for the U.S. cyber insurance market are grim.”

The recent proliferation of ransomware attacks leading to business interruption and other related hazards has caused cyber insurance – which began as a diversifying, secondary line – to become a primary component of a corporation’s risk management and insurance purchasing decisions.

Consequently, the A.M. Best report says, insurers urgently need to reassess all aspects of cyber risk, including their appetite, risk controls, modeling, stress testing, and pricing, to remain a viable long-term partner for dealing with cyber risk.

Cyber insurance “take-up” rates (the percentage of eligible customers opting to buy the coverage) are on the rise, according to a recent Government Accountability Office (GAO) report – to 47 percent in 2020 from 26 percent in 2016. This increased demand has been accompanied by higher prices for cyber insurance, as well as reduced coverage limits for some industry sectors, such as healthcare and education. In a recent survey of insurance brokers, the GAO says, more than half of respondents’ clients saw prices rise 10 to 30 percent in late 2020.

“The rate increases for cyber insurance outpaced that of the broader property/casualty industry, but the increase in cyber losses outstripped the rate hikes, which suggests more trouble for 2021 as ransom demands continue to grow,” said Sridhar Manyem, director, industry research and analytics at A.M. Best.

The A.M. Best report says the challenges the cyber insurance market faces include:

  • Rapid growth in exposure without adequate underwriting controls;
  • The growing sophistication of cyber criminals that have exploited malware and cyber vulnerabilities faster than companies that may have been late in protecting themselves; and
  • The far-reaching implications of the cascading effects of cyber risks and the lack of geographic or commercial boundaries.

In April, Federal Reserve Chairman Jerome Powell said cyberattacks are the foremost risk to the global financial system, even more so than the lending and liquidity risks that led to the 2008 financial crisis.  

“The world evolves, and the risks change as well and I would say that the risk that we keep our eyes on the most now is cyber risk,” Powell said. “There are scenarios in which a large financial institution would lose the ability to track the payments that it’s making, where you would have a part of the financial system come to a halt, and so we spend so much time, energy and money guarding against these things.” 

The Fed chief’s concerns have since been borne out by attacks on the Colonial PipelineJBS SA – the world’s largest meat producer – the New York City Metropolitan Transportation Authority, and others.

More recently, FBI Director Christopher Wray compared compared the current spate of cyberattacks with the challenge posed by the Sept. 11, 2001, terrorist attacks. He said the agency was investigating about 100 different types of ransomware, many tracing back to hackers in Russia.

As we’ve written elsewhere with respect to natural catastrophes, it seems the world has entered a phase in which the traditional emphasis on risk transfer through insurance products is no longer sufficient to address today’s complex, interconnected perils. A focus on resilience and pre-emptive mitigation is in order, and insurers are well positioned to serve not only as financial first responders but as partners in managing these evolving hazards.

Ms. Winnie Tsen, Assistant Director, Financial Markets and Community Investment, U.S. Government Accountability Office (GAO), was one of the key contributors to the GAO’s May 2021 report on cyber insurance.

Declarations of Pride: Ken Ross, John Hancock

By Scott Holeman, Media Relations Director, Triple-I

Triple-I’s Declarations of Pride series celebrates and features prominent LGBTQ+ insurance professionals. Meet Ken Ross, Vice President & Counsel at John Hancock Insurance, who says insurance companies are responding to the unique needs of the LGBTQ+ community.

Ken also says Diversity, Equity and Inclusion have never been more important in the workplace. Ken encourages the LGBTQ+ community to consider the insurance industry for rewarding career opportunities.

Ken has 30+ years of legislative and regulatory experience, specializing in state regulatory and legislative relations. Prior to joining John Hancock, he served as President and COO of the Michigan Credit Union League (MCUL), Assistant General Counsel for Citizens Republic Bancorp Holding Company (CRBHC), and Commissioner of the Michigan Office of Financial & Insurance Regulation.

He has degrees from the University of Michigan-Dearborn and Western Michigan University’s Thomas M. Cooley Law School.

Swiss Re: “Zombies”
Could Kill Recovery

Global pandemic.

Supply-chain disruptions.

Increasingly costly cyber-attacks.

Extreme weather and other climate-related hazards.

And now, zombies.

Swiss Re’s chief economist this week said failures of hundreds of “zombie companies” over the next few years are among the concerns prompting insurers to reduce risk and charge higher premiums – a trend that is likely to continue as corporate failures increase.

Zombies – companies that lack the cash flow to cover the cost of their debt – are “a ticking time bomb” whose effects will be felt as governments and central banks withdraw measures that have helped keep these companies alive during the pandemic, Jerome Haegeli told Reuters.

The sobering prediction comes as stock prices hit records and the U.S. economy appears headed for 6.5 percent growth this year. Haegeli said these strengths are illusory because they’re based on temporary fiscal and monetary support.

Insurers are being cautious: reining in underwriting risk, being more prudent about investment allocations, and even taking precautions on insuring operations and supply-chain risk.

“They are not getting fooled by the short-term picture,” Haegeli said. “If you look at the market today, everything looks great. However, it’s illusionary to think that this environment can last” as “life support” is withdrawn in coming months. And that, he said, will bring an increase in long-overdue bankruptcies.

It’s tempting to presume that, as the pandemic-driven aspects of the economic crisis are brought under control, recovery will proceed apace. After all, the economy was doing fine before the pandemic hit, right?

But in September the Bank for International Settlements (BIS) pointed to a “pre-pandemic increase in the number of persistently unprofitable firms, so-called ‘zombies’, which are particularly vulnerable to economic downturns.”

Before the pandemic, the BIS said, about 20 percent of listed firms in the United States and United Kingdom were zombies and 30 percent in Australia and Canada. By comparison, zombies constituted about 15 percent of listed companies in 14 advanced economies in 2017 and 4 percent before the 2008 financial crisis.

Absent any reason to believe these companies’ situations substantially improved during the pandemic or that the contagion didn’t spawn more zombies, the expectation of more corporate collapses seems reasonable.

Add to this rising losses due to hurricanes, severe convective storms, and wildfires; the threat of sea level rise; and the growing reality business and government disruption from cybercrime, and the likelihood of increasing premiums and reduced coverage limits seems strong.

IBHS Ranks Building Codes as Above-Average Hurricane Season Approaches

Building codes are critical to disaster mitigation, as well as to enabling families, communities, and businesses to bounce back from natural and man-made catastrophes.  The Insurance Institute for Business and Home Safety (IBHS) “Rating the States” report has become an important resource for comparing the quality of these codes and of states’ enforcement of them.

Published every three years, “Rating the States” evaluates the 18 states along the Atlantic and Gulf coasts, all vulnerable to catastrophic hurricanes, based on building code adoption, enforcement, and contractor licensing.

The 2021 Atlantic hurricane season is expected to be another “above-average” one.

“Damage reduction that results from the adoption and enforcement of building codes helps to keep people in their homes and businesses following a natural or manmade disaster, reduces the need for public and private disaster aid, and preserves the built environment,” IBHS writes in the most recent edition of the report. It cites research following Hurricane Charley in 2004 that found code improvements adopted in 1996 in Florida resulted in a 60 percent reduction in residential property damage claims and a 42 percent reduction in cost of claims.

Benefits of strong, uniform, well-enforced statewide codes are diverse and include:

  • Giving residents a sense of security about the safety and soundness of their buildings,
  • Preserving economic resources of a community and reducing post-disaster government spending,
  • Protecting first responders during and after fires and other disaster events,
  • Incorporating new best practices and cost efficiencies, and
  • Reducing solid waste in landfills from homes that are damaged or destroyed during disasters.

In the 2021 report, no state achieved a perfect rating based on the IBHS 100-point scale, though several states received high scores, including:

  • Florida (95 points)
  • Virginia (94 points)
  • South Carolina (92 points) and
  • New Jersey (90 points).

Other states that performed well were Connecticut (89 points), Rhode Island (89 points), North Carolina (88 points), Louisiana (82 points), Massachusetts (78 points), and Maryland (78 points).

The 2021 edition also includes information from the nonprofit Federal Alliance for Safe Homes (FLASH) to support consumer awareness and response to local building codes in their area.  Inspect2Protect.org offers a free building code look-up tool available to all homeowners.

“With more Americans living in harm’s way, it is even more critical for residents and communities to have the information they need to take action,” said Triple-I CEO Sean Kevelighan. “2021’s Rating the States report is essential reading for anyone who resides in a hurricane-prone state and wants a definitive assessment of its building codes.”

More information from Triple-I

Hurricane Season: More Than Just Wind and Water

Flood: Beyond Risk Transfer

Modern Building Codes Would Prevent Billions in Catastrophe Losses

California Earthquakes: How Modern Building Codes Are Making Safer, More Resilient Communities

Millions Saved in Japan by Good Engineering and Government Building Codes

2021 Atlantic Hurricane Season Forecast Update

The 2021 Atlantic hurricane activity is still expected to be above average, according to a June 3 update released by Colorado State University (CSU) hurricane researchers.

The CSU Tropical Meteorology Project team, led by Triple-I non-resident scholar Dr. Phil Klotzbach, predicts 18 named storms during the season (up from 17 in the previous forecast), eight of which are expected to become hurricanes – four of them major (Category 3, 4 or 5).

The probability of U.S. major hurricane landfall is estimated to be about 135 percent of the long-period average.

The 2021 hurricane season, which runs from June 1 to November 30, follows a record-breaking 2020 season. An average season has 12 named storms, six hurricanes and three major hurricanes.

As always, Dr. Klotzbach cautioned coastal residents to take proper precautions as “it only takes one storm near you to make it an active season.”

The full forecast can be accessed on CSU’s website.

Triple-I CEO: Insurance Leading on Climate Risk

Triple-I CEO Sean Kevelighan recently briefed regulators on the steps U.S. insurers are taking to reduce climate-related risks as weather-related catastrophes increase in frequency and severity.

Environmental, Social, and Governance (ESG) issues are in the insurance industry’s DNA, Sean said in a panel discussion hosted by the National Association of Insurance Commissioners’ (NAIC) Climate and Resiliency Task Force.  “While ESG priorities may seem new to many industries, insurers have long been involved in understanding and addressing these and other risk factors as a fundamental part of doing business.” 

Speaking on the first day of the 2021 Atlantic hurricane season, Sean pointed out investment decisions made by leading insurers that he said will likely lead to carbon emission reductions.

“Insured losses caused by natural disasters have grown by nearly 700 percent since the 1980s, and four of the five costliest natural disasters in U.S. history have occurred over the past decade,” he said.

To illustrate the point, he showed an inflation-adjusted chart showing an annual averageof$5 billion in natural disaster-caused insured losses incurred in the 1980s. That figure jumped to an annual average of $35 billion in the 2010s, the same Triple-I analysis found. 

U.S. insurers paid out $67 billion in 2020 due to natural disasters. The insured losses emerged in part as the result of 13 hurricanes, five of the six largest wildfires in California’s history, and a derecho that caused significant damage in Iowa

Given the millions of Americans who live in harm’s way, the Triple-I launched its Resilience Accelerator initiative to help people and communities better manage risk and become more resilient, Sean said. The goal of the Triple-I’s Resilience Accelerator is to demonstrate the power of insurance as a force for resilience by telling the story of how insurance coverage helps governments, businesses and individuals recover faster and more completely after natural disasters.

“The insurance industry’s focus on resilience is starting to pay dividends as more Americans recognize the very real risks their residences face from floods, hurricanes, and other natural disasters,” Sean continued.

A Triple-I Consumer Poll released in September 2020 found 42 percent of homeowners had made improvements to protect their homes from floods and 39 percent had done the same to protect their homes from hurricanes.

Download Sean’s slides